The interest rate on ten-year UK government bonds or gilts, and on their equivalent 10-year Treasury bonds in the USA, both went up again yesterday, implying in both cases that the sell-off of these bonds is continuing.
This is despite the fact that stock markets remained in pretty unhealthy states. No stock market has recovered its confidence after the Trump fiasco of the last week, despite his temporary suspension of some of the worst tariff increases.
If anything, though, the moves in interest rates on government bonds are much more worrying.
In short-term financial markets, which is what we are talking about, if stock markets are suppressed because people are selling, the interest rate on government bonds would usually fall, indicating that money has moved from shares into bonds. However, those rates have risen, implying that those bonds must also have been sold because, as I have explained previously, the relationship between the interest rate on traded bonds and their price is inverse.
So, where is the money from share sales going in that case, because property transactions will not be involved, as these are short-term movements?
The first place is gold, but that is not where most major financial operators go.
The second place is cash, but there is significant risk in holding substantial cash balances in banks that might be vulnerable in the event of a financial crisis, which prospect is real at present.
Money might, then, be moving elsewhere, with Euro markets being the most likely at present. The value of the euro has risen, maybe reflecting this fact.
Whichever of these is happening, the message being delivered appears very clear. It is that markets, at least in the UK and USA, are losing faith in the capacity of the governments in both countries to act as guarantors of their countries' financial systems.
In the case of the USA, the reason for this should be glaringly obvious. Trump is mad, bad and out of control. He is also very obviously at war with the Federal Reserve, and no one knows who might win that battle, creating massive uncertainty about the direction of US economic policy, which is going to have implications in international financial markets for years, if not decades, to come. The need for that major reorganisation of the organisations that underpin the international financial architecture that I have been calling for has become ever more pressing by the day, but as yet it is not being reflected in what leaders outside the USA are saying. No wonder US markets are worried.
Why, though, in that case, are UK markets following the lead of the USA on this issue?
Maybe it is simply because changes in interest rates in the USA have always had some implication for all financial markets, but that is not sufficient to provide the explanation at this moment.
Another explanation might be that even if markets do not think that Starmer and Reeves are either mad or bad, they do doubt their economic coherence because you cannot claim, as they do, tht their fiscal rules will remain intact whilst at the same time they will not increase tax rates and yet they will, supposedly, maintain government services. That is an equation that simply cannot work. It is an obvious impossibility to achieve at this moment.
In that case, the message that markets are sending is that they do not believe Rachel Reeves, and they are absolutely right not to do so. What she and Starmer are saying makes absolutely no sense in the world in which we now live. The consequence is that we are paying a high price for their stupidity.
This is not, however, just an issue of market frustration and higher rates. It is, in the very real sense, much more significant in that. Markets, especially outside the USA, now have to believe that those who are in charge of them have a grasp of what is required of them to create stability. If those in charge do not display that understanding the resulting loss of confidence in government's ability to stand as guarantors of their currencies and as borrowers the last resort (in other words, the people with whom money can be safely deposited) begins to collapse, and if that happens, we are in very deep trouble indeed.
To contextualise this, the game that Starmer and Reeves are now playing is becoming extremely dangerous. Unless and until they make clear that they have a new strategy that will simultaneously support the pound, maintain interest rates at levels that they desire, and sustain demand in the UK economy so that taxation revenue can be maintained, markets will continue to price their doubts about this pair's competence, as they are already doing.
I stress markers are not looking for miracles. What they want are three quite reasonable things.
The first is politicians who understand that it is their role to act.
The second is politicians who have the competence to act in whatever way might be required to ensure that markets have the backstop they need from government.
Third, is the ability to communicate this, because narratives are key at times like this.
It is not at all clear that Starmer and Reeves are possessed of any of these qualities, let alone all three, as is required. That is why we are in trouble. Markets are simply making that clear.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
The value of sterling against the euro is also closely shadowing the movement of the dollar. The markets, probably rightly, seem to see the UK financially, if not economically tied to the US – and the UK government’s US-EU ‘intermediary’ tactic as in effect US-dependency. If the US is going down (which seems to be the international consensus) the UK needs to resolve this by a clear pro-EU strategy – and quick.
Agreed
Thank you Geof – that is about the full extent of it and the fatal consequences of that need to be said over and over again.
Now, on the other hand, if we did not have austerity polices, Sir Stymied might be in a stronger position, but the austerity is making us so weak that we are not really strong enough to stand alone. Looking back at Christine Desan’s ‘opus ‘Making Money’ (2015), this little island punched about its weight by basically circulating its currency far and wide – not by withholding it.
We must join with Europe (but I would not like us to adopt the Euro).
I’ve thought of what to do with Rachel’s “cast iron” fiscal rules. (No, not that…!)
Stick ’em into one of the Scunthorpe blast furnaces and turn them into Great British Steel for HS2 railway lines, (using Great British Energy of course).
Everything in the above post is of course, unreal, just like money.
🙂
As you say, we are beginning to see the blow up of no Steer Keir ‘s “sitting on the fence” policy and Rachel’s “self harming, not for turning rules”.
Can we expect an iota of sense from them and the LINO genius advisers? Absolutely not.
Will it get worse? Most definitely.
“they will, supposedly, maintain government services” – that “supposedly” is bearing a lot of weight there! The UK government has chosen not to maintain government services, partly by deliberately underfunding local councils & health & education, partly by failing to invest in the necessary infrastructure. So little does the govt believe in the NHS that it has already sold off billions of pounds of NHS property, as this Canary report shows: https://t.co/TkPpsa3Dfi
Hi Richard
Perhaps a little off-topic, if so forgive me.
I recently read, unless I’ve picked up wrong, that UK is the 3rd biggest holder of US national debt, with a holding of somewhere around $800bn, just behind China.
I’m no economics expert, but understand how holding such debt will be beneficial to UK, however it’s the scale of our holding that puzzles me. Why does it have to be almost as big as China and apparently far, far higher than say France? Is it simplistic to tell Labour to “cash in” say, £50bn or so of that instead of depriving the UK poor, sick and elderly? Thanks.
Excellent question
Answer nit known
But we do have a trade surplus with the USA
And you debt data appears to be right
It’s USTs held by UK fund managers on behalf of clients from around the globe.
Thanks Clive. A quick scan reveals that c60% of foreign owned US national debts is held by public bodies vs 40% private.
I’m assuming, perhaps wrongly, that public means governments. Do you happen to know how UK owned US debt is split between public and private?
According to deanblundells substack Mark Carneys recent visit to Europe had more to do with a closed meeting between European leaders, which included Japan to work together.
Canada holds some $350 billion in US treasury bonds Japan more than $1 trillion no mention of the EU holding, anyway the point of the blog is that they met to work up a plan to stop Trump. So Canada, Japan and the EU, inlockstep, have shown Trump the cliff edge he was fast approaching. Carney rang Trump and told him they would pull the plug on treasury bonds if he didn’t back down.
Link to the article
https://deanblundell.substack.com/p/carneys-checkmate-how-canadas-quiet
full version
https://archive.is/O3AU2
Thanks
Interesting article and I think this idea of a coordinated “slow bleed” of US bonds has some merit. If so, the associated loss of confidence in UK bonds is even more worrying as it would imply that the fate of the pound, and all that flows from this, is too linked to the dollar (and hence Trump) for my liking, This may of course be because of the incoherent economic polices of Starmer and Reeves.
Interestingly, Gordon Brown was on Radio 4 BH this am and was saying he knew that Canada, Japan and EU had been in talks about forming new alliances (no mention of UK),
He also said what needs to happen is an international agreement for banks to cut interest rates.
Whether LINO listen to him anymore – who knows!
The U.K. is the rat who won’t leave the sinking ship.
The ‘special relationship’ is so deeply embedded in the UK establishment that it is impossible to imagine Starmer every contemplating an explicit tilt towards Europe . Especially after Brexit.
It will have to happen by default – and he/they will still claim to be a ‘bridge’.
Do they have the understanding or even the bottle to negotiate a reset with Europe.
No sign of that.
“Trump is mad, bad and out of control.”
Should be “Trump is mad, bad and insanely dangerously out of control.
Footnote: When Trump gives a middle finger to the SCOTUS, he is giving the middle finger to the die-hard “law & order” crowd which is 90% of his remaining support base. These are the people who loudly proclaim they stand for “Lawn & Order” and want to make America “Rake Again”. These are the people who control the HOA (Home Owner’s Associations) boards and are referred to in Florida as the “Condo Police”. Many of this group are also retired Veterans or did a good deal of military service. They are NOT amused by the latest shenanigans of their charlatan Fearless Leader.
I think that’s good to hear from a brigade for whom I have little enthusiasm
Hello Richard.
The majority of the people living in the U.K. cannot avoid whatever policies their governments put in place. They’re living here for the entirety of their lives and don’t have the financial resources to weather or avoid any hardships these policy choices bring.
So I suggest that, without taking anything away from your excellent blog, part of your blog could also be rearranged to apply to the public. Maybe.
I stress THE PUBLIC are not looking for miracles. What they want are three quite reasonable things.
The first is politicians who understand that it is their role to act TO TRY TO IMPROVE GENERAL PUBLIC QUALITY OF LIFE.
The second is politicians who have the competence to act in whatever way might be required to ensure that THE PUBLIC have the backstop they need from government.
Third, is the ability to communicate ANYTHING REASSURING AT ALL. Narratives are key.
I don’t have any confidence in Starmer or Reeves, and worry about how far things shall deteriorate whilst they faff about as if government is just a game.
I thought I was trying to address those issues…
Richard, it is precisely because you are trying to address those issues, and have written so extensively, that it becomes easier to see connections like this.
It’s a testament to your teaching, rather than any insight on my part.
Thanks
The collapse of Neoliberalism and possibly capitalism is close, I feel.
Perhaps we can begin to put aside the Thatcher/Reagan doctrine that greed is good too?