Julian Jessop

How much should we fear the return of the ‘bond vigilantes’?

BlackRock’s UK chief investment strategist, Vivek Paul, has warned this week that pre-election promises of large tax cuts or spending increases could unsettle the bond markets again. There are clear echoes here of the turmoil that followed the Liz Truss and Kwasi Kwarteng mini-Budget back in 2022. How worried should we be?

These warnings should not be dismissed lightly. BlackRock is a huge global player, with more assets under management than any other firm. Sentiment can be fickle and market selloffs are often self-reinforcing.

The mini-Budget backfired in part because of mistakes that no-one is now likely to repeat, such as sidelining OBR

There are also some reasons to think the market in UK government bonds, or ‘gilts’, might be particularly vulnerable to a buyers’ strike. For a start, the market for gilts is small compared to those for US treasuries or Japanese government bonds (JGBs), or the pool of bonds issued by governments in the euro area. It is not such a brave call for an international investor to go ‘underweight’ in the UK.

UK inflation has also been slower to fall, and the core rate (which excludes food and energy) remains relatively high. The Bank of England might therefore still be reluctant to lower official interest rates as quickly as other central banks. This could reduce the appeal of gilts, which have already rallied in anticipation of large rate cuts. In the meantime, the Bank of England is persisting with its policy of selling back the bonds that it had bought under ‘quantitative easing’, thus increasing the amount that must be purchased by private investors.

Finally, of course, many other commentors have pointed to the legacy of the Truss/Kwarteng mini-Budget. BlackRock’s Paul is not alone in suggesting that investor confidence in UK assets has yet to recover fully from that turmoil.

However, a sense of perspective is needed.

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