Michael Keaton may be reprising his role as Batman in the summer blockbuster Flash, but an altogether different vigilante is running roughshod over UK bond markets.
Following inflation far higher than the Bank of England predicted (again), yields on two-year gilts have risen dramatically to 4.84%. It might have escaped many people’s notice given the lack of media coverage compared with last September, but interest on government borrowing is now above the level seen at the peak of the Kwasi Kwarteng fiscal fiasco.
Lurking beneath the surface of all this is the return of the bond vigilantes. But what is a bond vigilante and what is the relevance of this in this high interest rate environment?
Essentially, we are talking about investment managers (often hedge funds) proactively protesting against a monetary or fiscal approach considered inflationary by selling bonds, thus increasing yields.
You have to go all the way back to the Eighties — the decade of Keaton’s first outing as Batman — for a time when the bond vigilantes were this active on the market.
Like the Batman franchise after George Clooney, they’ve been mostly lying low since then due to a prolonged period of ultra-low inflation. Only a matter of months after sticking two fingers up at a low tax and progrowth strategy, the debt markets are turning up their noses at Rishi Sunak and Jeremy Hunt’s more “fiscally conservative” agenda.
This would suggest that, as far as bond vigilantes are concerned, you are damned if you do and damned if you don’t when it comes to fiscal policy.
It is almost as if those looking to buy up or sell UK debt are more concerned with how they can use government rhetoric, regardless of the policy in question, for their own gains.
Ultimately, in the bond market, prices move inversely to yields. Therefore, despite all the concern last September about the UK Government being unable to repay their debt because it dared to cut taxes, what we are seeing at play is bond vigilantes flexing their muscle for financial gain.
Nothing wrong with this, but the Government should not be so sensitive to policy change just because a few vigilantes are looking to make a quick buck. It is not as if the UK is an outlier in all this.
We are seeing a very similar situation in the US where the yield on treasury bills was about 7% for a short period.
And in Japan, they are already spending 22% of their budget on interest. We saw that the nightmare last autumn led to the downfall of a chancellor and a prime minister. While there is not the same sort of political panic now, the bond markets would lead one to believe there is still considerable financial concern.
Although longer term maturity UK government debt is below last autumn’s levels, the fact that shorter term UK bond yields are at higher levels in response to contrasting fiscal strategies perhaps indicates that it is time for this “Conservative” government to stop allowing the debt investor tail to fully wag the fiscal policy dog.
