LONDON, Oct 17 (Reuters) – Watching Britain’s new finance minister tear down his leader’s economic policies on Monday made one thing clear – bond market regulators are back, they’re brave and governments had better pay attention.
It took just three weeks for markets to force the UK, the world’s sixth largest economy and one of its reserves, into a dramatic U-turn.
Attempts to cut taxes at a time when there were already huge holes in the national finances forced the Bank of England to step in and force former finance minister Kwasi Kwarteng out of a job, driving up UK borrowing costs.
Even after Monday’s reversal, losses on British government bonds, or gilts, persisted. The 10-year gilt yield is 46 bps higher than before the Sept. 23 mini-budget, the 30-year yield is 55 bps higher and mortgage rates are more expensive.
AXA chief economist Gilles Moeck said of the UK’s measures that “it’s certainly not the right time to experiment with fiscal policy”, adding that Monday’s round may have calmed “bond caution for now”.
The term bond vigilantes implies that debt investors are imposing fiscal discipline on prudent governments by forcing their borrowing costs higher.
Finance Minister Jeremy Hunt, trying to restore credibility, announced a new economic advisory council comprising four financial experts: former finance minister George Osborne, former chief of staff Rupert Harrison, now a former BoE member who works for Blackrock, Sushil Wadhwani, another former BoE official, Geertjan Vliege, now in New York. based hedge fund Element Capital and JPMorgan strategist Karen Ward.
Rising gilt yields have been more difficult than comparable German or US bonds, but senior economists suggest London is not alone.
This is because interest rates are rising globally and central banks are not conducting bond-buying programs that would reduce government borrowing costs over the long term.
Morgan Stanley estimates that by the end of 2023, the balance sheets of the four largest central banks—the Federal Reserve, the European Central Bank, the Bank of Japan and the BoE—will shrink by about $4 trillion.
That’s nearly four times the amount of stimulus money pulled out of the system in 2018-19 when the Fed tried to end its stimulus in the wake of the financial crisis.
In the year “They’re baaack!” said Ed Yarden, who coined the term Bond vigilantes in the early 1980s. He blogged. When England’s offense first exploded last month.
In the year This year’s rise in US mortgage rates to their highest level since 2008 is another possible issue, and he thinks heavily indebted Italy could be a target if Europe experiences a full-blown energy crisis this summer.
“Central banks controlled bond vigilantes with ZIRP, NIRP and QE,” Yardeni said, referring to the ultra-low interest rates and stimulus of the post-financial crisis years. “No more: they are back in the saddle again and riding at full speed”.
It was torn
Many European governments are torn between the need to protect households and companies from energy shocks when Russia cuts gas supplies, and the need to fight inflation and keep public finances sustainable.
Italy has long been troubled by a massive public debt of 150% of GDP and low economic growth.
The victory of right-wing parties in September’s national election, after campaigning for higher pensions, welfare payments and a 15% tax on the self-employed, has raised concerns, without saying how they will be funded.
Hungary has also shown that emerging markets are always in the market.
The central bank was forced to raise some interest rates to 25% on Friday, after a week earlier to try and end the cycle of rate hikes.
A warning shot?
Still, the crisis sparked by Britain’s austerity budget has sparked international panic.
Even US President Joe Biden was speaking Bond vigilante language over the weekend, suggesting he wasn’t the only one who thought the UK plan was “wrong”.
The market was hit hard last month when Germany, the euro zone’s biggest economy and benchmark bond issuer, announced a 200 billion euro package of new loans to help deal with the damage from the energy crisis.
The German package focused on energy support and could be spread over a longer period, analysts said, explaining why Germany’s debt plans did not trigger market volatility in the way that the UK’s plan did in September.
“This is probably the biggest example of bond vigilantes in action,” said Antonio Cavarero, head of investments at General Insurance Asset Management. If this can happen to the UK, it can happen to any other economy.”
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Additional reporting by Dhara Ranasinghe; Editing by Dhara Ranasinghe and David Evans
Our Standards: The Thomson Reuters Trust Principles.
