Labour’s stagnant economics seems set to ship bond yields greater than below Liz Truss: ALEX BRUMMER

A haze of mystery hangs over the market for government bonds. Updates on stock market indexes and the pound’s value against foreign currencies routinely appear in news bulletins. 

Everyone enjoys the story of rocketing shares, such as American artificial intelligence chip makers and designers Broadcom and Nvidia.

Bond prices and yields rarely are stuff of headlines. This is partly because of the counter-intuitive see-saw effect. 

Falling bond prices mean higher interest rate returns, which might seem a good thing. Higher bond prices mean lesser returns.

It is usually during crises that bonds feature. At the peak of the Greek debt crunch in 2012 yields reached 44.7 per cent. 

In the US the yield on ten-year bonds sits at 4.3 per cent, reflecting uncertainty over a deal between Biden’s outgoing administration and Congress over an increase in government debt.

Bond Misery: The yield on ten-year Government bonds is up to 4.63% since Kier Starmer became PM – That is as high as it was during Liz Truss’s sojourn and 30% up over the past year

In Britain gyrations in the bond market became seared in the public domain during Liz Truss’s short period as Prime Minister. 

Unfunded tax cuts in October 2022 sent the ten-year bond yield above 4.5 per cent. 

The speed of the sell-off of UK Government debt caused a market shock. Fixed-term mortgage costs rocketed overnight.

Most critically, it nearly brought Britain’s pensions system crashing down. Unbeknownst to most retirees, asset managers had used their holdings of UK bonds, or gilt-edged stock, to increase returns by investing in a derivative product known as liability-driven investments. 

The use of borrowing to buy these could, without intervention, have brought the whole system down. Hence Labour’s charge that the Tories ‘crashed the economy’.

Keir Starmer’s Government, with its big Commons majority, came to office promising to restore economic stability and cut the cost of mortgage renewals. 

Yet, despite a £40billion tax-raising budget on October 30 and a shift in the fiscal rules to make it easier for Government to invest, markets are unimpressed.

Instead of narrowing, the yield on ten-year Government bonds is up to 4.63 per cent. That is as high as it was during Liz Truss’s sojourn and more than 30 per cent up over the past year. 

Far from inspiring global confidence in Britain’s prospects, as Chancellor Rachel Reeves promised, it has worsened. 

There has been British schadenfreude over Germany’s manufacturing-led slump and its political stalemate. 

Yet German bund yields, at 2.38 per cent, are half those in the UK. Italian bonds yielding 3.52 per cent are more than a full percentage point lower than those for the UK.

So why the difference? Far from delivering growth, Starmer’s Government threatens stagnation. 

Markets do not much like Rachel Reeves’ change in the fiscal rules. The introduction of a new debt measure – public sector net financial liabilities – which seeks to redefine previously off-balance sheet items such as student loans, is unconvincing. 

The guardian of the public finances, the Office for Budget Responsibility, has warned of ‘potential fiscal illusions’. That is hardly a vote of confidence.

As far as consumers, homeowners and businesses are concerned, Labour’s budgetary sleight of hand has made life harder rather than easier. 

UK borrowing costs, both short term (due to inflation fallout from the Budget) and medium term, are too high. That puts pressure on households and makes economic expansion harder.