There is one thing scarier than markets lurching around. And that’s markets lurching around without a very compelling explanation.
Just yesterday, the yield on the government’s 30-year bonds – the best measure out there of the UK government’s long-term cost of borrowing – closed at the highest level since 1998, not long after Oasis released the album Be Here Now. Indeed, the yields on pretty much all UK government debt has been creeping up in recent weeks, though not all are back to Britpop era levels.
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In some senses, this looks very odd indeed. After all, the Bank of England just cut interest rates. In normal circumstances, you would expect measures of borrowing costs to be falling across the board. But clearly these are not normal times.
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All of which raises the question: is this a UK-specific phenomenon? Are markets singling out Britain for particular concern, much as they did after Liz Truss’s notorious mini-budget? Actually, there are more questions on top of that one. For instance, is this all about Rachel Reeves’s recent woes, and her need to find another £20bn, give or take, to make her sums add up? Are investors fretting about the Bank of England’s inflation-fighting credibility, given its cutting rates even as prices rise?
The short answer, I’m afraid, is that no one really knows. But a glance at a few metrics can at least provide a bit of context.
The first thing to note is that while government borrowing costs in the UK are up, they have also been rising in other leading economies. The UK, it’s worth saying, is a bit of an outlier with higher yields than in fellow G7 nations. But that’s not exactly a new thing: it’s been the case since the mini-budget. But the UK is a particularly ugly duckling in a lake full of them.
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Indeed, look at other nations, and you see that Britain’s budgetary challenges are hardly unique. The US and France have ballooning budget deficits which are rising rapidly. Most European nations have pledged enormous increases in military spending to satisfy Donald Trump’s demands of NATO.
And over the Atlantic, the US administration has just committed to a sweeping set of generous fiscal measures, under its One Big Beautiful Bill Act. Even Elon Musk has voiced concerns about what this means for the deficit (which is set to continue rising ad infinitum, at least on paper).
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All of which brings us to the broader, possibly scarier, lesson. There are signs afoot that while G7 nations could depend for decades on other surplus countries – most notably China and other Asian countries – buying vast amounts of their debt in recent years, that might no longer be the case. In short, even as rich countries borrow like crazy, it’s becoming less clear who will lend them the money.
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That’s an enormous conundrum, and not good news for anyone.
