Britain is an oasis of calm on the bond markets compared to the US and France

As Labour implements its ‘growth’ agenda, Rachel Reeves will be guided by one overarching thought. As a former Bank of England economist, she knows more than most that the formidable power of the vigilant bond market – investors intent on intimidating errant governments for their own gain – must be her guiding light.

If Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng had realised this two years ago, Keir Starmer and Reeves might well still be on the opposition benches.

Market-driven economic disasters are rarely forgiven by the electorate, especially when they cause the cost of loans and mortgages to rise significantly.

Reeves’ determination to stick to more government borrowing and rising national debt and the mantra that all manifesto promises must be ‘funded and budgeted’ is no coincidence.

This is the hard financial lesson that France and the US must keep in mind as election fever takes hold.

France’s far-right Rassemblement National party may believe that the eurozone will provide a safety net no matter what happens when votes are counted tonight for the second round of parliamentary elections.

As a result, it believes the country can avoid a Truss tantrum. There is no guarantee, as the people of Greece who endured a terrible period of austerity after the debt implosion of 2008-2010 will testify.

As Donald Trump’s star rises in the polls, US bond markets are being shaken out of their complacency amid fears over Joe Biden’s declining mental faculties.

If US government bonds, also known as Treasuries, take a hit, the dollar and Wall Street stocks, supported by the outsized valuations of the “Magnificent Seven” technology stocks, could fall sharply in value.

The shifting of tectonic plates could easily trigger a global stock market crash.

Rich G7 countries have racked up huge debts to pay for Covid-19 lockdowns, the energy crisis caused by Russia’s war on Ukraine, and bloated climate change subsidies, so they don’t really have a safety net.

With the exception of Germany, all countries have enormous debts relative to national production.

Britain actually looks far less vulnerable to a new bond market explosion than other countries going to the polls. Bond yields – the interest a government has to pay to attract lenders and therefore a key indicator of how risky markets think debt is – have narrowed.

With inflation now back at the 2 percent target, it looks set to be the Bank of England cutting interest rates from the current 5.25 percent as early as next month.

The underlying budget deficit – the difference between a government’s daily spending and its tax revenues – is 1.4 per cent of national output in the UK. In France, however, it is an alarming 5 per cent.

According to credit ratings agency S&P, pressure on the Labour government to spend money on crumbling public services and infrastructure is “the elephant in the room”.

But in France, the prospect of a government backed by Marine Le Pen and a 28-year-old prime minister, Jordan Bardella, who is just getting started, has sent shivers through European bond markets.

President Macron has sought to unite the opposition against the populist right. The price of his political maneuvers is a coalition with Jean-Luc Mélenchon’s radical far-left wing, which embraces big-spending ideas.

Bardella’s own pledge to abolish VAT on fuel would cost the French exchequer almost £10bn alone. Following Jeremy Corbyn’s magic money tree, the National Rally also promises to increase spending on social services, nationalise motorways and – in a nod to free-market capitalism – cut income tax.

Before today’s election, the yield gap, the difference in yield between the German benchmark bond and French bonds, had narrowed by 0.7 percentage points.

That may just be the beginning. Shares on the Paris Bourse – which for a time surpassed the London Stock Exchange in total market value – have fallen 6 percent in the past week, in what could be the start of a rout.

America is far from immune to bond market disruptions or a run on the super-strong dollar. Republican administrations are generally thought to be better for government finances because of a fundamental belief in balanced budgets.

However, the turn in public opinion in favor of convicted felon Donald Trump since Biden’s failed debate in Atlanta is causing unrest on Wall Street.

The yield on US 10-year government bonds has risen to 4.5 percent on expectations of a Trump victory.

The maverick former president’s campaign promises to impose tariffs on foreign imports, cut taxes and take on the Federal Reserve for keeping interest rates too high for too long are beginning to sow panic around the world.

This is happening at a time when China and other countries are buying up all the gold they can get their hands on. They don’t want to hold hundreds of billions of dollars of US Treasuries in their reserves.

Britain appears to be an oasis of calm amid the bond market disruptions in France and the US.

In fact, several mortgage companies felt confident enough to cut the cost of fixed-rate mortgages on election day, with the Rightmove tracker showing the average five-year mortgage deal falling below 5 per cent.

Starmer and Reeves, despite the gloomy rhetoric, are in relatively benign markets. The big danger is that Labour, in an attempt to pay for a bigger state, will raise taxes so much that it kills an incipient recovery.