Labour’s stagnant economy looks set to send bond yields higher than under Liz Truss: ALEX BRUMMER

An air of mystery hangs over the government bond market. Updates on stock indices and the value of the pound against foreign currencies routinely appear in news bulletins.

Everyone enjoys the story of skyrocketing stocks, such as American chip makers and artificial intelligence designers Broadcom and Nvidia.

Bond prices and yields rarely make the news. This is partly due to the counter-intuitive wipe effect.

Falling bond prices mean higher interest yields, which might seem like a good thing. Higher bond prices mean lower returns.

It is usually during crises that bonds play the leading role. At the height of the Greek debt crisis in 2012, yields were 44.7 percent.

In the US, the 10-year bond yield is at 4.3 percent, reflecting uncertainty over a deal between the outgoing Biden administration and Congress on a rise in national debt.

In Britain, bond market fluctuations entered the public domain during Liz Truss’s brief spell as Prime Minister.

Unfunded tax cuts in October 2022 pushed the 10-year bond yield above 4.5 percent.

The speed at which British government debt was sold caused a market shock. Fixed-term mortgage costs have skyrocketed overnight.

Most crucially, the British pension system almost collapsed. Unbeknownst to most pensioners, asset managers had used their holdings of UK bonds, or gilt-edged shares, to boost returns by investing in a derivative product known as obligation-based investments.

Using loans to purchase these could, without intervention, have collapsed the entire system. Hence Labour’s accusation that the Tories have ‘crashed the economy’.

Keir Starmer’s government, with a large majority in the House of Commons, came to power promising to restore economic stability and reduce the cost of mortgage extensions.

But despite a £40 billion tax increase on October 30 and a shift in budget rules to make it easier for the government to invest, markets are unimpressed.

Instead of falling, the yield on ten-year government bonds has risen to 4.63 percent. That is the same as during Liz Truss’ stay and more than 30 percent more than last year.

Instead of inspiring global confidence in Britain’s prospects, as Chancellor Rachel Reeves promised, things have deteriorated.

There is British gloating about the German industry-induced slump and political impasse.

Yet the interest rate on German government bonds, at 2.38 percent, is half that of Great Britain. Italian bonds with a yield of 3.52 percent are more than a full percentage point lower than those of Britain.

So why the difference? Rather than delivering growth, the Starmer government is threatening stagnation.

Markets don’t like Rachel Reeves’ change in fiscal rules. The introduction of a new debt measure – the public sector’s net financial liabilities – that aims to redefine previously off-balance sheet items such as student loans is unconvincing.

The guardian of public finances, the Office for Budget Responsibility, has warned of ‘potential budget illusions’. That is certainly not a show of confidence.

For consumers, homeowners and businesses, Labour’s budget sleight of hand has made life more difficult rather than easier.

UK borrowing costs are too high, both in the short term (due to the impact of budgetary inflation) and in the medium term. This puts pressure on households and makes economic expansion more difficult.