Another Budget, another prime minister glancing at yields on his phone, as he sits next to his chancellor while they are delivering their customary speech.
Is there a real risk that gilt yields will consign Sir Keir Starmer to the history books as they did Liz Truss? The experience of losing a PM due to post-Budget market turbulence is all too fresh and begs the question: should businesses, consumers and investors fear bond vigilantes torpedoing another Budget?
The short answer is, no they probably shouldn’t.
For one, the bond market’s focus is fixed on bigger themes, such as the dollar, trade wars or inflation fears. Other news may be priced in, but in the end investment committees will focus on the larger issues.
Budgets can be important, to be sure, and yields will likely nudge towards one direction or another, depending on the Labour government’s fiscal approach, but it would take a previously uncommunicated surprise bigger than these themes to spark a bond sell-off enough to invite central bank intervention.
Second is that collective trauma is often converted to collective knowledge, especially over the shorter term. It will be difficult for any government to try and surprise markets with big decisions. It is more likely that any big changes in direction would be leaked well ahead of time to test market waters. This would leave time for the government to retrace its steps if it feels that reactions might be too strong.
Third, 2025 is not 2022; 2022 was one for the history books. Bond markets were coming off a 30-year bull run. At the beginning of the year, near-zero yields clashed with the reality of persistent inflation and central banks behind the curve racing to hike interest rates. By October 2022, global bonds were down 20 per cent for the year, marking their worst performance in modern financial history, very far from anything this usually docile asset class had experienced since 1973.
The change in the monetary system away from the gold standard, the 70s inflation waves, persistent geopolitical turbulence, multiple financial crises and sharp rate hikes at their very worst caused some -3 per cent to -4 per cent performance in the past 50 years. 2022 ended with more than three times that underperformance and October was the peak of that crisis.
So Kwasi Kwarteng’s choice to surprise voters with a big tax cut simply coincided with what amounted to a fixed income Armageddon. Comparatively, today’s bond market may be a bit volatile due to tariff policy uncertainty, but nowhere near the 2022 levels.
Fourth, yields are actually attractive this time. At 4.7 per cent one could argue that the UK 10-year yield is certainly more attractive than the 2.9 per cent during that fateful budget. Even at its peak, the 2022 crisis saw rates reach 4.5 per cent before they retreated to 3 per cent. The 5 per cent yield is a psychological purchase barrier for many an investor, providing at the very least a cushion of support against another bond rout (prices fall when yields rise).
Does that high yield let the government off the hook? Still no. Present yields are almost at the highest they have been since the 2008 global financial crisis. This leaves the government little room for fiscal manoeuvres, which must be extremely focused on announcement and laser-precise in execution.
Even if an expansive Budget will not likely spark another 2022-like crisis, even higher borrowing costs could cripple fiscal plans for years to come.
George Lagarias is chief economist at Forvis Mazars