Bond markets - is the shit hitting the fan?

[LawdAMercy]

People who know about these things - AIBU in crapping myself about the future of the UK and the possibility of global financial Armageddon?

If the government didn’t borrow money it wouldn’t be in hock to the bond markets.

As we live beyond our means/tax receipts, we have to borrow money. The bond market is the vehicle for that borrowing.

Democracy has feck all to do with it.

I'm amazed you had to explain that!

I could write pages on this but I’ll try to be concise.

Bonds are under pressure globally.

There are two main factors at play. Investors don’t trust central banks to keep inflation under control. In the U.S, they have a target of 2% and long term implied inflation is between 2.2% and 2.56%, depending on how you model it. With the two main wars going on, that puts more pressure on commodity prices and then inflation. So central banks should be raising short term rates, which is a tough call as it will stifle growth and maybe push us into recession.

Another big factor is there is less free money to lend than there was a few years ago. At that point the big tech companies were flush with short term cash and they parked it in the treasury market while they considered where to invest it. Well, they found somewhere in large amounts-AI! They have flipped from being lenders to being huge borrowers.

So the supply and demand for money has totally changed and that means higher rates. To be honest, we haven’t really seen a panic yet, and longer rates seem ‘about right’ given inflation. Of course, that could change.

A solution, which I have posted on another thread, is a wealth tax on the super rich. They are the ones with money and have been treated very well by the tax systems, especially in the U.S. A wealth tax of 1-2% on anyone worth over $50 million, say, could raise hundreds of billions and pay down debt.

To sum, you are right to be worried. A proper bond crash would spill over into the equity markets. We need to sort out the wars, have less political pressure on central banks (yes Donny!) and somehow stop the wealthy hardly paying any tax.

And, just to add, there is a geopolitical dimension to this.

If you own a country’s bonds, you have a powerful lever over that country.

That is part of the reason (along with rare earths) that the U.S is very happy to try to intimidate virtually everyone, bar China. If they sold their holdings of U.S treasuries in a meaningful way, it would trigger a major market crisis.

Well yes and double yes!😃

But obviously to some Mumsnet people the world revolves around the UK.

Oh and I think China might have a bit more clout too

How can anyone say this with a straight face after what the tories did with fourteen years in power? They massively increased the national debt, stripped public services, didn't build infrastructure and tanked the economy under Truss. Yet Labour are the bad guys?

Oh, wow. Not this old bollocks about the left being irresponsible with the nation's finances again!
https://www.taxresearch.org.uk/Blog/2021/06/24/the-tories-have-always-borrowed-more-than-labour-and-always-repaid-less-they-are-the-party-of-big-deficit-spending/

Is he going to rip up all of the regulations that produced the bat tunnels and newt conservation zones? And put 100% effort into reducing energy costs in the UK? Because they are the main things holding back investment in the UK. Nope. He’s whanging on about bus fares and Number 10 North, which is why the bond market are upping our debt interest. He doesn’t seem to be a serious politician at all.

The frustrating thing about this is that there is a consensus behind the scenes among policymakers and even senior politicians about what needs to be done but any politician which has the courage to do it would not be elected.

The UK is spending massively more than it takes in tax receipts. Its tax system and benefits system also creates many disincentives to work, and benefits are too generous with minimal safeguards on receipt.

The government needs to

1. Change the triple lock so that the state pension increases in line with average earnings. Pensioners would still be protected from inflation so this is still a generous treatment.
2. Dramatic changes to eligibility for disability benefits. These should be restricted to more severe cases, only with face-to-face assessments and with payments for under 25s restricted only to services for the child (e.g. therapy/carers for autism rather than cash payments). Mobility payments should be restricted only to cases where there are physical impairments and an adapted car is needed, not for ADHD/ASD.
3. Reform the cliff edges in the tax and benefits system so that work is not encouraged. Child benefit to be universal again, change the removal of the personal allowance to changes in marginal tax rates so no longer a disincentive to work, all working families to be eligible for childcare help. The cost of means testing child benefits and childcare are massively outweighed by the disincentive effect of working.
4. Merge tax and NI so that pensioners have the same tax rates as working age people.
5. Minimum wage to be frozen for the next few years particularly for young people. It is so much better for people's mental health for them to be working and current rates are now at a level which are deterring employment.
6. Review planning reforms to make building much easier. Restrict the appeals process.
7. Reform the wholesale electricity market so that the price is no longer set by the marginal price of gas, change distribution to a regional pricing system and reduce green levies. Sounds technical but would reduce energy costs which feed through to the entire economy and would help to lower the cost of everything.

If these policies were announced, UK debt costs would fall significantly. But I expect that I will be called heartless for suggesting the above.

@PAYE I’d add freeze benefit levels for a couple of years.

It's incorrect though.

When the bond markets rise, mortgage rates actually fall, because a "rising bond market" means bond prices are going up, which forces bond yields (interest rates) down.

This is a common mix-up between bond prices and bond yields. They move in opposite directions like a see-saw:

When bond prices rise: Market demand is high, so the cost of borrowing drops. Fixed mortgage rates fall.

When bond yields rise: Investors demand a higher return due to risk or inflation. The cost of borrowing spikes, and fixed mortgage rates rise.

During the 2022 "Mini-Budget," the market did not "rise", it crashed.

Investors panicked, causing UK government bond (Gilt) prices to plunge and Gilt yields to skyrocket at historic speeds. Because UK banks price fixed-rate mortgages based on swap rates (which track Gilt yields), mortgage costs surged instantly.

the "investor" (or rather, market) panic was fundamentally a systemic crisis triggered by pension fund hedging structures.While the spark was Liz Truss’s uncosted mini-budget, the actual explosive force came from Liability-Driven Investment (LDI) strategies used by UK defined-benefit pension funds.

UK pension funds used derivative contracts (LDIs) to hedge against long-term interest rate drops. To boost returns, these portfolios were highly leveraged, requiring only a tiny cash deposit relative to the scale of the debt they held.

Oh this is worrying me, I was just about to put 13k in stocks and shares. Maybe I shouldn’t?

If you are worried, drip feed it in eg £1k a month and keep the rest in savings meanwhile.

Generally speaking, it's a bad idea for amateur investors to try to time the market (and this also goes for taking money out in response to events, not just getting in)- it's fantastically difficult to get it right- even professionals don't- and you have to be right twice, calling the top and calling the bottom. In general you're better off just leaving your money where it is and riding out the dips, assuming you don't need to access your money meanwhile. People definitely shouldn't be taking money out of S&S ISAs and moving it into unwrapped savings- if you really want to get out of equities then just but a money market fund or similar.

Hear hear. Not heartless at all- esp re minimum wage rises which have hugely backfired and led to the enormous number of NEETs. Rises sound nice but if the effect is that employers can't afford to recruit young people, they are harmful to both young people and the country as a whole.

You've presented a blog. Seriously.

Depending on your age, that is one of the dumbest moves you could have made.

Merge tax and NI so that pensioners have the same tax rates as working age people.

If you're going to treat pensioners as if they were workers, you're going to have to increase pensions.

The state pension is £12,548 per year. That's approximately half of the national minimum wage - £24,784.50 for 37.5 hours per week.

BTW, the UK devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies (per House of Commons research).

You seriously presented a bare assertion that the idea a Labour government could be fiscally responsible was an oxymoron that made you chuckle. It's hardly a PhD thesis in public finance is it?

financial independence and private capital act as a critical buffer against government tyranny, serving as an economic check that complements political checks and balances. When individuals, businesses, and institutions control their own financial resources, the state cannot easily starve out opposition, control public narrative, or enforce total compliance.

Life experience is my source.

Doesn't work for a number of reasons.

NMW should reflect the average persons living costs which may include bringing up kids and paying mortgages.

State pensions should reflect the average pensioners living costs. Which is less likely to include expensive things like bringing up kids and paying mortgages.

Should have just stuck with Sunak

This is a misleading comparison. The UK has an extensive private pensions system which is given generous tax breaks. In other European countries - e.g. France and Germany - employers pay into the 'state pension' so that the amount that a person receives depends on their earnings - in effect merging the state and private pension system. When one takes into account private pensions (and so is a like-for-like comparison), the UK compares favourably.

Tax only becomes relevant when a person has other income. I see no reason why the young (who often are at a much more expensive life stage e.g. supporting children) should retain less of the same income than older people.

NMW should reflect the average persons living costs which may include bringing up kids and paying mortgages.

Then why do childless people get NMW? Or people whose children have grown up?

Almost all of the policy problems I identified come from the coalition and conservative government (triple-lock, making PIP eligible for mental helath conditions, getting rid of face to face assessments, green levies etc). Not to mention Brexit. The conservative period in office from 2010-2024 did so much long-term economic damage.

There are more over 70s paying tax than under 30s.

I'm not paying more tax on the market dependent fluctuating savings I have to live on in order to fund non working under 30s and immigrants. For what? 3rd world healthcare workers and care workers? No thanks.

The country has imported 12 million people as the apparent solution to every problem. Have them pay for your benefits and healthcare instead of borrowing money to subsidise them.

Never going to happen is it?