Britain knows all about the bond market crisis and how quickly events can spiral out of control.
Attempts by Liz Truss and Kwasi Kwarteng to restore the Tory narrative of low taxes crashed and drove them out of Downing Street as the price of gilt-edged shares collapsed, yields soared, the cost of mortgages skyrocketed and pensions nearly imploded.
Successors Rishi Sunak and Jeremy Hunt have spent much of the past year trying to restore market confidence in the stability of British public finances.
The fire in Gaza and concerns that it could spread to the northern borders of Israel and Iran are causing new alarm in the U.S. Treasury market, which lubricates much of the global economy.
President Biden’s big spending spree may have found support among progressives, including the Labor Party, but they continue to unnerve bond markets.
Confident: US Treasury Secretary Janet Yellen (pictured) claims there is no ‘dysfunction’ in the government bond market despite the spike in yields
Reports that Biden, fresh back from Israel, will ask Congress for another $100 billion to help finance military campaigns there and in Ukraine are unlikely to be met with equanimity among lawmakers or in the bond markets.
There is a paradox in the latest eruption in the US Treasury market. In last trading, U.S. Treasury yields rose nearly 5 percent for the fourth day in a row.
That is a level not seen since 2007 and the first cracks in the banking system that led to the great financial crisis.
In a period of geopolitical uncertainty, you would normally expect the largest asset managers and traders to seek the safest havens, such as the dollar.
Gold tends to gain momentum, but this is of limited importance as the market is no longer deep or liquid enough. So US bonds, or government bonds, are normally the port of call for investors looking to protect their wealth if the world goes up in smoke.
But not this time. The collapse of the banking system, the pandemic, Ukraine and now the Middle East mean that the US has joined the club of countries where the debt-to-production ratio is above 100 percent.
US Treasury Secretary Janet Yellen claims that despite the spike in interest rates, there is no dysfunction in the government bond market.
Her comments are treated with skepticism by union vigilantes, the self-appointed guardians of stability.
The markets are adjusting from the era of free and easy money, and interest rates will remain higher for longer than anyone predicted.
They are doing the Fed’s job by slowing down a booming American economy that refuses to be tamed.
But should tensions escalate in the Middle East, don’t be surprised if Yellen turns out to be right, as strong U.S. interest rates and U.S. security trump everything else.
False
The announcement of a ‘strategic review’ by Hipgnosis appears to be an attempt by founder Merck Mercuriadis to save its own skin.
Lazy chairman Andrew Sutch (who will soon be on his way) has been ineffective in containing Merck’s exuberance.
The plan to sell some bright names, including Kaiser Chiefs, Shakira and Barry Manilow, to a rival owned by Blackstone and advised by Mercuriadis was a major conflict of interest.
Before shareholders dump him altogether, they should recognize that he’s a pioneer in the song royalties space, making plenty of acquisitions before the biggest beasts in music, like Universal, started bidding up values. It’s disappointing that royalty income is being cut and the fund’s performance has never lived up to its promise.
But there is intrinsic value in what he has created. With more professional, less volatile management and a stronger, more reliable board, it should be possible to salvage something valuable from the wreckage.
Investors should vote against the Blackstone deal, try to rebuild the company rather than liquidate it, and find a more financially astute CEO.
Travel bug
Any notion that royal pied piper Rentokil should hold out and move its share price to New York after last year’s £5.5 billion purchase of Terminix, making the US its biggest market, should be dismissed.
Granted, sales growth is slow, but that can be remedied. Rentokil has rid Britain of pests since the 1920s and has enormous growth potential with a new plague of bedbugs and more.
British companies have discovered that the move to Wall Street may get loud cheers at the opening bell, but it condemns foreign companies to anonymity.