Labour spent years blaming Liz Truss for Britain’s market credibility problem. But on 12 May, gilt yields surged — and voters should care because higher borrowing costs eventually land on taxpayers.
During the Liz Truss thing there was a problem with pension funds which I didn't quite understand. It was something to do with the value of Gilts falling and funds having to sell off assets to pay their obligations. The BOE had to step in. But Gilt yields are up higher now than they were then but we haven't heard anything about problems with pensions this time.
I think the difference is that between the B of E actions ( sale of billions of bonds) and the Truss budget only a matter of days apart delivered a seismic shock to the bond market . While yields are significantly higher now , they have merely been on a steady albeit sustained upward trajectory ever since . Of course what this means is that anyone who has bought govt bonds in recent years will be sitting on significant losses if they make a trade
You are right - only a matter of days before the Truss budget , the Bank of England dumped several billions of bonds which inevitably caused yields to rise and spooked investors . My understanding was that such was the panic that institutional investors then liquidated their holdings in pension funds which had leveraged up on bonds and these were called in - hence causing pension funds huge losses.
So yes - you are right the B of E actions only made things worse for Truss and Andrew Bailey received much criticism at that time . Ultimately it was largely resolved when the Bank intervened a few days after the budget and bought back billions of bonds
Very interesting article and very timely too, Jamie.
I was in conversation with a mate of mine at the weekend who was complaining about the cost on remortgaging his buy to let. He was blaming it all on Truss ( he is a lefty) and I tried to explain that as damaging as her budget was at the time, it was in reality little more than an aberration ie given all the economic and geopolitical events that have occurred in recent years . People seem to remember the turmoil unleashed on the bond market in the immediate aftermath of the Truss budget but most forget that within a matter of days ( after the B of E intervened) order was largely restored
It’s interesting how 'Liz Truss' has become a catch-all explanation for any economic headwind. While the 2022 event definitely created a risk premium for the UK, your point about global factors is backed up by the data.
As the article suggests, if we blame the 2022 spike entirely on domestic politics, we have to apply that same logic to the 5.1% yields we’re seeing today. It’s much harder for the current government to claim 'global factors' now if they didn't allow for that nuance back then. Credibility is a two-way street!
It’s hard not to feel that way when the numbers are laid out like this, Maria. The 'risk premium' on the UK seems to be sticking around regardless of who is in Number 10. When borrowing costs rise like this, it eventually trickles down into everything—from mortgage rates to the tax burden. It feels like the country is running up a down escalator.
Thanks Jamie. I am seeing a scary parallel with what is happening in New York at the moment. When you overburden tax payers, particularly those that provide job opportunities, they leave... and I think the same will happen here in the UK. Now that Plaid Cymru won in Wales, I am sure devolution will be their top priority, only to have the power to tax us more and more.
Not necessarily- whilst yields are the highest since 1998 , this refers to the prevailing market rate ie not the date of issue . At any one time , there will be tradeable 30 year bonds available to the market but with a variety of redemption dates . My understanding the earliest redemption date on any 30 year bond is circa 2050
Jamie, I checked the ONS numbers today, I do not believe a word of the growth numbers. If you look at retail it is very heavy. I believe the retail numbers are being propped up with insolvency sales distorting the actual true sales. This is the funeral of the high street being represented as growth. what say you?
Labour blame Brexit as well - for anything.
During the Liz Truss thing there was a problem with pension funds which I didn't quite understand. It was something to do with the value of Gilts falling and funds having to sell off assets to pay their obligations. The BOE had to step in. But Gilt yields are up higher now than they were then but we haven't heard anything about problems with pensions this time.
I think the difference is that between the B of E actions ( sale of billions of bonds) and the Truss budget only a matter of days apart delivered a seismic shock to the bond market . While yields are significantly higher now , they have merely been on a steady albeit sustained upward trajectory ever since . Of course what this means is that anyone who has bought govt bonds in recent years will be sitting on significant losses if they make a trade
You are right - only a matter of days before the Truss budget , the Bank of England dumped several billions of bonds which inevitably caused yields to rise and spooked investors . My understanding was that such was the panic that institutional investors then liquidated their holdings in pension funds which had leveraged up on bonds and these were called in - hence causing pension funds huge losses.
So yes - you are right the B of E actions only made things worse for Truss and Andrew Bailey received much criticism at that time . Ultimately it was largely resolved when the Bank intervened a few days after the budget and bought back billions of bonds
Very interesting article and very timely too, Jamie.
I was in conversation with a mate of mine at the weekend who was complaining about the cost on remortgaging his buy to let. He was blaming it all on Truss ( he is a lefty) and I tried to explain that as damaging as her budget was at the time, it was in reality little more than an aberration ie given all the economic and geopolitical events that have occurred in recent years . People seem to remember the turmoil unleashed on the bond market in the immediate aftermath of the Truss budget but most forget that within a matter of days ( after the B of E intervened) order was largely restored
It’s interesting how 'Liz Truss' has become a catch-all explanation for any economic headwind. While the 2022 event definitely created a risk premium for the UK, your point about global factors is backed up by the data.
As the article suggests, if we blame the 2022 spike entirely on domestic politics, we have to apply that same logic to the 5.1% yields we’re seeing today. It’s much harder for the current government to claim 'global factors' now if they didn't allow for that nuance back then. Credibility is a two-way street!
This is truly outrageous! This country is really shouting out loud to me now: get the hell out of here!
It’s hard not to feel that way when the numbers are laid out like this, Maria. The 'risk premium' on the UK seems to be sticking around regardless of who is in Number 10. When borrowing costs rise like this, it eventually trickles down into everything—from mortgage rates to the tax burden. It feels like the country is running up a down escalator.
Thanks Jamie. I am seeing a scary parallel with what is happening in New York at the moment. When you overburden tax payers, particularly those that provide job opportunities, they leave... and I think the same will happen here in the UK. Now that Plaid Cymru won in Wales, I am sure devolution will be their top priority, only to have the power to tax us more and more.
If 30 year gilts are at there highest since 1998, does that mean the country has a big bill in two years time when those gilts mature?
Not necessarily- whilst yields are the highest since 1998 , this refers to the prevailing market rate ie not the date of issue . At any one time , there will be tradeable 30 year bonds available to the market but with a variety of redemption dates . My understanding the earliest redemption date on any 30 year bond is circa 2050
Jamie, I checked the ONS numbers today, I do not believe a word of the growth numbers. If you look at retail it is very heavy. I believe the retail numbers are being propped up with insolvency sales distorting the actual true sales. This is the funeral of the high street being represented as growth. what say you?