Latest news with #bondvigilantes
Irish Times
5 days ago
- Business
- Irish Times
The bond vigilantes are on the prowl
The bond vigilantes are growling and baring their teeth, and authorities around the world (most of it, anyhow) are doing the right thing, and backing away. But the risk of bond wobbles spiralling into a broader outbreak of nerves across markets is high. From the US to the UK and Japan, bond investors are making it clear they are unwilling to be used as a low-cost cash machine for government spending forever. The circumstances for each country vary but the underlying force is the same: the world has changed. Inflation is higher, central banks are not soaking up bonds as they once did, and yet governments still want to borrow like it's going out of fashion. Now, bond investors want to be rewarded properly for the risks. The UK's head of debt issuance, Jessica Pulay, said she would lean more heavily on short-term debt to meet the country's financing needs, because borrowing costs on debt with a longer shelf life have become uncomfortably high – the effect of weaker investor demand. READ MORE If bond prices deteriorate further, analysts reckon the Bank of England could pull back on sales of debt that it accumulated after the Covid crisis. In Japan, it is a similar story. Long-term borrowing costs raced higher last week after domestic investors, stung by unusually high inflation expectations and painfully high market volatility, baulked at continuing to absorb debt maturing far out into the future. Thirty-year yields shot to more than 3 per cent – their highest point in decades, reflecting a steep decline in the price of the bonds. This is high drama in a national bond market known as a cure for insomnia. Again, the ministry of finance has restored a fragile calm only, reportedly, by suggesting that it too might skew new debt issuance on to the shorter term, so investors feel like they are taking on lighter risks. [ US economy fast becoming Trump's Achilles' heel Opens in new window ] In the US, the big thumbs down from the bond market came in the immediate aftermath of Donald Trump's poorly-received so-called 'reciprocal' tariffs in April. With conspicuous timing, the president brought in a 90-day pause after the usual foreign buyers sat on their hands and refused to buy in to a normally rather routine auction of three-year debt. As Trump himself said, the bond market had become 'yippy'. Last week, the bond market struck again, providing patchy support to fresh 20-year debt from the US treasury. The dollar dropped and bond prices fell in response – an alarming indication that investors are backing away from US risk at a time when the White House is seeking to pass a spending package that adds over $3 trillion (€2.65 trillion) to government borrowing over the next decade. 'Ultimately, there are only two 'solutions' to this problem: either the US has to sharply revise the reconciliation Bill currently sitting in Congress to result in credibly tighter fiscal policy; or, the non-dollar value of US debt has to decline materially until it becomes cheap enough for foreign investors to return,' concludes Deutsche Bank's George Saravelos. 'Brace for more volatility.' One reliable truism in markets is that deficits don't matter until they do. Well, now they do. Some context is useful here. Investors are not allergic to all borrowing. It is worth noting that Europe is spared this kind of hand-wringing, at least for now, as higher levels of borrowing, especially in Germany, are likely to stimulate growth while a stronger euro, buoyed by a search for alternatives to the dollar, will help keep inflation under control. [ From crypto to private jets: How Donald Trump and his family have profited from the US presidency Opens in new window ] In addition, we are not even close to panic stations yet. 'Oh no, here we go again,' laments Dario Perkins at TS Lombard. 'If you are a macro doomster, there is no level of yields that will keep you calm,' he writes. When yields fall, investors fret they are a signal of an impending recession. When they rise as they are now, he said, the mood shifts to 'OMG fiscal crisis!' – a sentiment Perkins does not fully share. This is a fair point. But it is clear that, for a host of reasons in a number of key markets, bond investors' patience is wearing thin, and the danger is that this leaks in to other asset classes. Why bother buying stocks when bonds offer such generous returns? US stock markets, hopped up on demand from retail investors, are not reflecting this risk yet. But this year has taught us that sentiment can switch at speed. Do not be surprised if the snarling bond vigilantes take the blame for the next vibe shift. – Copyright The Financial Times Limited 2025
Daily Mail
24-05-2025
- Business
- Daily Mail
HAMISH MCRAE: Bumpy summer ahead for Britain's finances
The bond vigilantes are on the warpath, and this is bad news for the Chancellor. They are prowling the streets everywhere, hunting down any government they think is borrowing too much and beating it up by pushing up long-term interest rates. The UK is not alone. The US and Japan also saw the cost of financing their national debt rise last week. In the case of America, it was mostly a reaction to Donald Trump's 'big, beautiful bill' passed by the House of Representatives, which cut taxes and increased spending. It looks like it will boost their fiscal deficit to 7 per cent of gross domestic product (GDP), scary indeed. For Japan it was a more general concern that since the national debt is more than double its GDP, the declining population will not be able to pay the interest on it, let alone get the number down. But while other countries have dodgy national finances, we are very much in the firing line – and for good reason. Last week there were two chunks of bad news. One was inflation, with the Consumer Prices Index (CPI) climbing to 3.5 per cent. This was billed as 'unexpected', although anyone who didn't expect it has been reading the wrong newspaper. It certainly makes a mockery of the recent cuts in interest rates by the Bank of England, given that the bank has a mandate to bring inflation down to 2 per cent. The City expects at least one further rate cut this year, but I think it is perfectly possible the next move will be up, not down. The other was the news that in April, the first month of the new financial year, the Government's deficit went up. Revenues were £5.6 billion higher than in April 2024, but spending was up by £6.6 billion. The increases in public sector pay more than wiped out the rise in employers' National Insurance Contributions and the Chancellor's other tax increases. Looking ahead, it gets worse. A quarter of our national debt is index-linked, and to the Retail Price Index, which was 4.5 per cent last month, even higher than the CPI. Inflation is also likely to push up the state pension next year. This has just gone up 4.1 per cent, thanks to the so-called triple lock, where pensions rise by the highest of three things: the CPI, average earning increases in the previous autumn, or 2.5 per cent. This year it's been rises in earnings that were the top marker. We don't know what they will be in four months, but they are now 5.6 per cent and inflationary pressures may push them higher still. So the Government may have to confront the harsh fact that, if it honours its commitment to keep the triple lock, that will blow an even bigger hole in the finances. The bond market knows all this – that is why it pushed the yield on ten-year gilts above 4.75 per cent in trading on Friday. The US is paying about 4.5 per cent. Is it unfair that we should have to pay more since objectively our national finances are no worse than theirs, arguably a bit better? Sure, but markets are not fair and our Government must live with the fact that it is distrusted by those who can lend it money. The practical question for the rest of us is how to protect ourselves if there is a coming crunch. In the continuing chaos we have to accept two things. One is that short-term interest rates may not fall further and may start climbing again. The other is that Government bond yields will probably rise, with ten-year gilts settling above 5 per cent. If that is right, anyone needing to borrow should bolt down the best deal as soon as possible. Pessimistic, yes, but better safe than sorry. As for investment, higher bond yields are usually been associated with lower equity prices, but equities give protection against inflation and the UK market is cheap by historical standards. So the common sense rules still apply: in the long view shares are better than bonds and you should always spread risk. We shouldn't be frightened by what is happening. But we should be aware that if markets are bumpy now, they are likely to be a lot more so through the summer and beyond.
Bloomberg
23-05-2025
- Business
- Bloomberg
BofA's Hartnett Says Buy the Dip in Treasuries as Yields Top 5%
Investors should buy the selloff in long-dated Treasuries as the government is likely to heed warnings from bond vigilantes to bring its debt under control, according to Bank of America Corp.'s Michael Hartnett. The 30-year Treasury note is at a 'great entry point' with the yield above 5%, the strategist wrote. Bond investors are 'incentivized to punish the unambiguously unsustainable path of debt and deficit,' he added.
Yahoo
22-05-2025
- Business
- Yahoo
3 reasons bond investors are panicking about the US budget deficit
Bond investors have been in a panic this week about the deficit. The GOP tax bill could add trillions to the US budget deficit in the next 10 years. Here's why bond markets are dismayed by that prospect, and what it means for the economy. The US budget deficit is the story markets are fixated on this week, with panicked bond investors sending yields spiraling higher and spooking the stock market. The bond market is responding to the possibility that the GOP budget bill, which passed in a vote in the House of Representatives on Thursday morning, could add trillions to America's budget deficit. The Treasury sell-off continued on Thursday after the bill was sent to the Senate, with the 30-year bond yield edging past 5.1%. The 10-year US Treasury yield rose past 4.6%. So, why are investors so worried about the deficit? This embedded content is not available in your region. There are three things top of mind for the so-called bond vigilantes. The government has been growing the deficit — or the difference between what it spends and what it collects in revenue — for years. The US hasn't had a balanced budget since around the turn of the century. It ended its last fiscal year with a $1.8 trillion deficit. Moreover, the US has been borrowing rapidly to fund high deficit spending. According to the latest data from the Treasury Department, the total federal debt balance has climbed to a record $36.2 trillion. The GOP's "big beautiful bill" will eat into government revenue by slashing taxes. There are a range of estimates, but the version of the bill that advanced to the Senate this week could add up to $4 trillion to the deficit in the coming decade, according to a projection from the Tax Foundation. This means even more borrowing will be needed to fund basic government functions, such as running social programs and the military. According to Michael Brown, a senior research strategist at Pepperstone, investors are concerned that debt levels could be reaching unsustainable levels. In the 2024 fiscal year, the government paid $881 billion on debt interest payments, according to the Congressional Budget Office. By 2035, total interest payments are expected to rise to $1.7 trillion a year, per the CBO's projections. "I think the issue is more that starting to worry about whether we're getting close to or whether we are at a sort of tipping point," Brown told Business Insider. "It is not a new phenomenon. I think the problem is we're all now starting to wake up to the fact that nobody, certainly in the US, actually wants to do anything to get things under control." With higher deficits comes even more debt. Debt is inflationary and could raise prices for Americans. A projection from the Yale Budget Lab estimates that a 1% increase in the US debt balance relative to GDP—which would roughly be the impact of extending Trump's 2017 tax cuts—could erode the purchasing power of households by $300 to $1,250 over the next five years. Government spending is also a significant driver of economic activity, and the more it spends on servicing its debt, the less money it has for other things. "There's a finite amount of cash. It can be used on better things than paying down the interest bill," Brown said. This is particularly the case in an era of higher interest rates. After over a decade of historically low rates, borrowing costs are up again. The US spent more servicing its debt than it did on the military for the first time last year, with debt service amounting to 3.1% of GDP growth, according to data from the Federal Reserve. "These factors interrelate, of course: the size of the national debt means higher borrowing costs have a more material impact on the US fiscal position," analysts at Impax Asset Management wrote this month. All of the borrowing and deficit spending could lead to less confidence that the US is the safest market for investors' money. "Governments that run sustained deficits rely on creditors' confidence that debts will be serviced and repaid. Large structural deficits and rising national debts increase the risk of default," Apex said, though it added that a default for the US is still unlikely. Brown said the government could be forced to offer higher yields if investors ever appeared hesitant to keep buying Treasurys. This played out to a degree this week, when an auction of $16 billion 20-year Treasury bonds was met with weaker-than-expected demand and sold at the highest yield since 2020. Brown thinks bond volatility will smooth out in the near term. Given Trump's focus on the 10-year Treasury yield and his promise to lower borrowing costs for Americans, the tax bill could be amended to make investors more confident in the US, he speculated. "The market has just got very, very jittery right now over what's going on in Congress and digesting it, but actually should be okay in two or three months. Things should settle down," he said. Read the original article on Business Insider
Bloomberg
22-05-2025
- Business
- Bloomberg
The Bond Vigilantes May Need a Lot of Rope
Save To get John Authers' newsletter delivered directly to your inbox, sign up here. The infamous bond vigilantes are starting to inflict some real pain, and they're not coming for just the US. The suffering for holders of the longest-dated bonds is global, and the market's informal enforcers have brought enough rope to ensnare them all. It's tempting to pile the sharp rise in 30-year yields uniquely on the US and its squabbling politicians, but other markets are seeing selloffs just as dramatic, often thanks to their own local factors.
