The Clinton aide James Carville was once asked that, were he to be reincarnated, what he’d like to come back as. “I used to want to come back as the president or the pope or a .400 baseball hitter,” he replied. “But now I want to come back as the bond market. You can intimidate everybody.” The bond market has a huge power over George Osborne, whose entire project is based on being able to borrow at rock bottom rates. A month ago, the Chancellor was being charged just 1.9pc on new loans. As of today, it has shot to 2.53pc. Look at how the market has behaved in recent weeks:-
Osborne’s debt-a-thon was made suddenly more affordable. The bond bubble means the massive pileup of debt (above) will suddenly be a lot less expensive. When Osborne went into No11, he imagined he’d have to pay 5pc. Suddenly rates drop to 1.8pc. The markets saw danger everywhere, so they piled into government gilts for want of any safer refuge. The greater the demand, the less interest Osborne’s government has to pay. The below chart shows how much this has saved: the Treasury thinks £8.3 billion this year, and £11.2 billion next year. The Treasury is now betting that these rates stay very, very low (under 3pc) for a very, very long time.
It could well be that today’s gilt rate spike is a freakish over-reaction to the QE unwinding in America. Osborne had better hope so.
Because he can’t afford for borrowing costs to overshoot, in the same way that they have undershot. Osborne’s recovery plan, like the British housing market, is based on the hope that rates will stay pinned to the floor. I’ll leave you with a quote from Merryn Somerset Webb’s recent story about Osborne’s Bubble.
Osborne’s debt-a-thon was made suddenly more affordable. The bond bubble means the massive pileup of debt (above) will suddenly be a lot less expensive. When Osborne went into No11, he imagined he’d have to pay 5pc. Suddenly rates drop to 1.8pc. The markets saw danger everywhere, so they piled into government gilts for want of any safer refuge. The greater the demand, the less interest Osborne’s government has to pay. The below chart shows how much this has saved: the Treasury thinks £8.3 billion this year, and £11.2 billion next year. The Treasury is now betting that these rates stay very, very low (under 3pc) for a very, very long time.
It could well be that today’s gilt rate spike is a freakish over-reaction to the QE unwinding in America. Osborne had better hope so.
Because he can’t afford for borrowing costs to overshoot, in the same way that they have undershot. Osborne’s recovery plan, like the British housing market, is based on the hope that rates will stay pinned to the floor. I’ll leave you with a quote from Merryn Somerset Webb’s recent story about Osborne’s Bubble.
UPDATE The brilliant Linda Yueh points to this research note about the end of the bond bubble.Now think about the bank rate today: it is well below the rate of inflation. If the base rate tripled, it would still be only 1.5 per cent. But if it were normal relative to inflation, it would be around 5 per cent. Then mortgage rates would be at least 7 per cent. Could you pay your bills then? Could your neighbour? And what about all those people who had to be shifted to interest-only mortgages because they couldn’t afford normal ones, even with the bank rate at its lowest level for over 300 years? Quite.
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