Renewed fighting in Middle East weighs on financial markets; Shein shares tumble after Hong Kong stock market debutLonger-dated gilt yields have also surged, which means higher borrowing costs for Andy Burnham’s government.The yield, or interest rate, on the 30-year gilt jumped 9 basis points to 5.88%, the highest since March 1998.Gilt yields are up and it’s tempting to blame this on UK-specific factors.
But government bond yields are surging across the world, especially in America. That doesn’t mean the UK is off the hook. We still have to pay a higher interest rate than similar countries, suggesting investors see us as a riskier place for their cash. That reflects a combination of political risk, low growth and sticky inflation.The energy shock and the threat of rising inflation are important factors.
Inflation expectations matter because inflation erodes the purchasing power of a bond’s fixed payments. When investors believe inflation could remain elevated, they demand a higher yield as compensation.Inflation has been above target in the UK and US for much of the past five years, raising questions about whether it will return sustainably to 2%.
Meanwhile, various governments have not followed through on promises to bring deficits down. Lenders therefore have to factor the prospect of higher inflation and greater bond issuance into the price they are willing to pay.The elephant in the room is the rise of economic populism.
There is a logic to populism, whether it comes from the right or the left. Both versions tend to favour expansionary fiscal policy – tax cuts, higher spending or both – tolerate higher inflation and resist efforts by central banks to restore price stability. If such policies continue for long enough without a course correction, the risks of financial and currency instability increase.
Global investors understand where such policies can lead. Continue reading…
