ECONOMYNEXT – UK bond yields surged to decade highs with the 10-year reaching levels not seen since the US housing bubble burst, and 30-year bonds not seen since 1998, amid concerns over government finances and growth.
High yields indicate unwilling investors to hold longer term bonds. Secondary market values of long bonds fall steeply when yields go up.
The higher yields come despite the Bank of England cutting rates amid easing inflation.
The rates have edged up around 100 basis points over a year and 50 basis points over the past month.
Close to 4.9 percent for 10-year debt, the yield exceeded the level struck in 2022 in the UK when the then Prime Minister Liz Truss advocated more tax cuts for ‘stimulus’ on top of overspending and money printing during the Coronavirus crisis.
The 30-year bond has hit 5.4 percent.
New concerns over a slowing economy – which can reduce tax revenues and boost borrowings, as well as more capital expenditure outlined in a recent budget, have spooked markets, analysts said.
“The leap in gilt yields to multi-decade highs is an extra headwind to an economy that had no momentum at the end of 2024,” Paul Dales, chief UK economist at Capital Economics research group was quoted as saying by AFP news agency.
While the 2008 housing bubble was triggered by US open market operations that financed private lending agencies, recent money printing in the US and other advanced nations have gone for government spending.
The Cambridge-Saltwater stimulus which worsened state finances even as money was printed for quantitative easing also became the latest fad among macroeconomists after the Housing bubble burst, leading to a steady deterioration of state finances.
When the US Fed under the influence of Ben Bernanke started to reverse ‘deflation’ from 2000, the country was running the first budget surpluses since the collapse of the gold standard.
Many pegged exchange rate nations have defaulted recently. However floating rate nations are able to survive longer.
After the European Central Bank followed the Fed in an 8-year credit cycle (usually central bank fueled cycles are around 4 year and during the Great Moderation they have been shorter at times), debt crises hit Greece, Spain and Portugal.
In 1976, the UK almost defaulted after several years of Cambridge-economics and the Barber-boom of Oxford educated Chancellor of the Exchequer, Anthony barber.
The UK was bailed out by the IMF, its biggest ever loan at the time and friendly nations.
Macro-economists and central bankers usually push rate cuts and government spending until countries are driven to the wall, and the end of the road is reached for ‘macro-economic’ policy, critics say.
At the time Labour Prime Minister James Callaghan tried to fix the budget and rates were also raised in the first round.
“We used to think that we could spend our way out of a recession and increase employment by cutting taxes and boosting government spending,” Prime Minister Callaghan said famously in the 1976 Labour Party Conference.
“I tell you in all candor that option no longer exists.”
In Sri Lanka however a new monetary law was enacted legitimizing ‘potential output’.
Along with the UK, President Jimmy Carter also cut budgets. Carter also appointed Paul Volker, known for his hard money views, knowing that he was going squeeze the monetary excesses with the inevitable fallout.
Both men were kicked out by the electorate in stabilization crises.
In the UK, Margarat Thatcher came to power after the stabilization crisis known as the ‘winter of discontent’.
She raised VAT and also rates in her first budget taking control of monetary policy, amid strong opposition from macroeconomists of the Cambridge school, who wrote a letter of protest.
Thatcher and a subsequent Labour government put the country on a path of absolutely falling commodity prices, free trade and growth, which ended with the Fed’s Housing bubble and reflation.
Gold prices fell from 800 dollars an ounce to 284 under the Great Moderation from 1980 to 2000. Gold has since climbed to 2,600 dollars an ounce under aggressive positive inflation targeting and quantity easing.
Since then public finances of many countries have deteriorated amid quantity easing, though private banks have been more cautious. The caution may now be transferring to government debt, analysts say.
Incoming US President Donald Trump has also threatened deeply Mercantilist views, including import tariffs invoking memories of depression era protectionism that delayed an economic recovery. (Colombo/Jan11/2025)
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