UK gilt yields surged last Thursday, sending the return on 30-year government bonds beyond 6 per cent for the first time since 1998. Ten-year gilt yields also climbed above 5.5 per cent, reaching a level not seen since 2007.
Yields eased slightly on Friday as the immediate market alarm subsided. Even so, the so-called bond vigilantes are clearly back, and I have yet to hear a market commentator suggest that this upward cycle has reached its peak.
My expectation is that the 10-year yield, which matters greatly for the cost of government borrowing, will move above 6 per cent. Before long, it could even approach 7 per cent.
For any government planning to raise vast sums of money, that prospect is deeply alarming.
If Andy Burnham has not yet accepted that higher borrowing costs could derail his spending ambitions, he clearly needs to pay closer attention to the financial headlines.
Yet I also feel a powerful sense of relief. Savers have been steadily undermined by persistent inflation, and the bond markets are now performing an important public service by demanding greater financial discipline.
If Andy Burnham has not yet grasped that rising borrowing costs could wreck his spending plans, he needs to read the financial headlines more closely
That pressure applies to every borrower: not only governments, but also companies willing to pour money into ventures unlikely to generate a worthwhile return.
It is also compelling central banks to confront inflation rather than simply hope that price growth will eventually fade without decisive action.
Ultimately, the issue is much bigger than bond yields. It concerns confidence in fiat currencies such as the pound, dollar and euro.
That confidence is weakening, which helps explain why investors are seeking assets they regard as tangible or genuinely real. That does not mean those alternatives have all performed well; some have delivered distinctly disappointing results.
I’m Simon Lambert, publisher of This Is Money, and you need to understand that your pension, savings and property may soon face fresh financial pressures.
Andy Burnham’s government is due to unveil its Budget on October 28. Its decisions remain unknown, but a number of tax increases are already in the pipeline. The sensible response is to prepare now. I have brought together some of Britain’s leading financial specialists to create a new six-week plan that cuts through the uncertainty and explains, step by step, how to protect your money.
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Bitcoin has staged a recovery, but at around $86,000 it remains more than 25 per cent below its year-to-date position.
Gold reached a high of $5,600 an ounce in January, yet it has since fallen below $4,200.
Oil prices have risen sharply for understandable reasons, although they remain below the record levels reached in 2008.
But it is difficult to place lasting faith in money when its purchasing power has declined year after year throughout our lifetimes.
Consider this figure: average annual inflation since 1970—the year the Prime Minister was born—has stood at 4.81 per cent. The Bank of England’s inflation calculator shows that £142.40 today would be needed to purchase what £10 could buy at the time.
And if you had purchased a 50-year gilt in 1970 and held it until maturity in 2020, inflation would have eroded roughly 90 per cent of its original purchasing power.
You would have had the interest but would be way down on the investment. If, on the other hand, you had bought a house you would have seen a real rise of seven or eight times what you paid.
So ask yourself: why should anyone lend long-term to this Government now?
The UK is not alone. The US has a similar credibility problem, with a budget deficit and a debt-to-GDP ratio even higher than ours. It pays slightly less than we do to borrow for 10 years, but the gap has shrunk from 0.5 per cent to around 0.25 per cent.
France is in a mess, paying nearly 5 per cent for 10 years, 1.5 per cent higher than Germany, the widest premium since the eurozone crisis of 2011.
It is proposing to reduce its budget deficit by around €50bn by cutting spending and increasing taxes, but that does not seem to have calmed markets. Investors trust Germany, they don’t trust France.
And judging by the rates charged to the US and UK, they don’t trust either of us much too.
So why do I feel relief?
It is that the sooner that governments are forced to curb deficits and that central banks are forced to increase interest rates, the less likely it is that inflation will burst out of control.
The less likely it is that we will have the social unrest of the 1970s, where workers were pitted against employers as they tried to claw back in higher wages what they had lost in inflation.
The less likely it is that interest rates will go to double digits, as they did for most of the 1970s and all the 1980s.
And the less likely it is that taxpayers will continue to be cheated by having savings whittled away by governments that won’t control their spending.
