How politicians should talk to bond markets

I can feel it in my waters. A terrible thing is about to happen: UK politicians are going to start saying daft things about the bond market. We must all be prepared.

The reason, of course, is the official start of political manoeuvring season after this week’s local elections sent an important message to the UK’s ruling Labour government and the country’s prime minister, Sir Keir Starmer. That message was “ugh”.

So, we can now see parties to the more extreme left and right argue with at least some justification that they have their sights set on Downing Street. And we can see individual rivals to Starmer within his own party, particularly a little to his left, calling for him to step down and clear a path for them to take the top job.

Whether those rivals and pretenders like it or not, the bond market will be watching. It can smell weakness or incompetence, or just a basic lack of understanding, a mile off. And again, whether they like it or not, if the market pukes on their proposed solutions for public finances, that will limit their ability to progress to the top job.

So, in the spirit of trying to avoid painful market shake-outs, here are my top tips for what aspiring political leaders should say when bond investors are listening.

The first is: Bonds are our friends. Governments have three ways to fund themselves — selling off national assets (which doesn’t get you very far), taxing people and businesses (which they generally don’t like much) or, through the miracle of capitalism, borrowing billions off investors. Most rely on a mix of options two and three. 

It is tempting to blame the bond market for your woes, whinge that it hampers your options, wail about fat cats and City wide-boys bossing elected officials around. Both Zack Polanski, leader of the Green Party, and Andy Burnham, the Manchester mayor with an eye on Starmer’s job, have made noises about not wanting to be “in hock” to the bond market — a message that Burnham has since sought to row back. But if you don’t want to play nicely with the bond market, you have to gather pretty much every penny you wish to spend through taxation, and best of luck getting that past the public on general election day. 

Some content could not load. Check your internet connection or browser settings.

Bond investors really hate a few things. One is inflation, which eats into bonds’ value over time. Another is excessive borrowing — if a government floods the market with loads of bonds, then the value of those bonds will fall. And weaker bonds mean higher borrowing costs, for the government, for businesses, for anyone paying off a mortgage. As Chancellor Rachel Reeves has pointed out, repeatedly, “£1 in every £10 the public sector spends now goes on debt interest — four times what we spend on nurses”.

Bond investors like growth and stability. They like boring. Politicians like nurses. So you see where I’m going here. Nice calm bond markets mean more money for public services. It’s not a gift to tawdry speculators — it’s a public good.

The second key thing for British politicians in particular to remember is that we are big borrowers, as a proportion of the economy, but we are small on the global stage. The UK government bond market, known as the gilts market, is a tiddler in comparison to the US equivalent, known as Treasuries, which boss the global bond market around. If Treasuries stumble for any reason (a rise in inflation expectations due to a war of choice in a major oil-producing region that blocks major shipping routes, for example) then gilts are powerless to resist being pulled in the same direction. 

It is important to avoid catastrophising or over-correcting here. The gilts market is open, it’s functioning fine, (no, we’re not going to the IMF for a bailout) and investors are willing to fund public services. But gilts are rather more sensitive to global vulnerabilities than other comparable markets.

Another thing about being small is that foreign investors are people, too. They have a choice about whether or not they buy gilts, which, let’s remember, are mostly denominated in sterling — a rather volatile currency. And they remember the gilts market bonfire in late 2022 after the Liz Truss “mini-Budget” all too well. It is wise to avoid giving them reasons not to bother with the risk of drops in the bonds or in the currency, and instead to give them reason to believe that the money we borrow will make the country stronger over time. They like to see money spent on real things like infrastructure rather than just on paying off older debts.

My final top tip is that no politician should imagine he or she is the chosen one who can face the bond market down. Trust me, you can’t. Truss famously found this out the hard way. Even Donald Trump was forced to rethink his global trade tariffs last year after his bond market balked. 

It’s annoying that money is not free and that the bond market imposes constraints. But fighting it is like trying to fight the weather. Wild statements about borrowing and spending and an uninformed, hostile relationship with the market, from any part of the political spectrum, are a choice, and a bad one at that.

[email protected]