What are UK bonds thinking?

Katie Martin (0:09)

The UK's bond market is on fire. It's the 2022 GILTS crisis all over again. Investors are recoiling in horror at the Labour government's policies. That, listeners, is what the more excitable bits of the internet would have you believe. Is it right, though? I'm gonna give you a spoiler alert here and say no. Keep listening, and we'll tell you what's actually going on.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, busily trying to swat away the UK disaster tourists. And I'm joined by Robert Armstrong, president-elect of the Unhedged newsletter and a pesky American who does at least know where the UK is because he lived here for a bit. Rob, why can't we have nice things? Why can't we have a nice quiet civilized start to the year?

Robert Armstrong (1:03)

Katie, I have no idea. I mean, it has something to do with the fact that the job of most important person in the world is changing hands. I think that's safe to say. So we're going to have a new president and that makes everything look less clear, more confusing, possibly more scary, all of that stuff. So that's in the air.

Katie Martin (1:28)

I think you're right about that. Now, I mean, how much of an eye is the US keeping on what's been going on in the UK market? Or would you benefit from a short refresher?

Robert Armstrong (1:39)

Yeah, no, we would benefit. As you said, I did live in the UK, but since leaving there a few years ago, I've forgotten everything about it. I'm not sure I could find it on a map, to be honest.

Katie Martin (1:49)

It's a little island. So look, the short version is UK government bonds have had a bad start to the year, right? They've been falling pretty quickly. We've seen some pretty big falls, particularly at certain points last week. And obviously the Labour government is only about sort of six months in office. It had a budget. We did all of its kind of spending plans in October. And the line on this that lots of people are taking is that what's happening now, this like drop in UK government bonds, I mean, I think like the 10 year yield has gone to the highest since 1998

Robert Armstrong (2:27)

And what is that? Roughly, what are we talking about?

Katie Martin (2:30)

Oh, God, I can't remember now. I haven't got the number in front of me. But like, so we're talking about 4.6%, 4.7.

Robert Armstrong (2:39)

So US yields, to be fair, are in the same and right in that range.

Katie Martin (2:43)

Exactly.

Robert Armstrong (2:44)

4.77 for a US 10 year, I think.

Katie Martin (2:46)

You just saying that because you've got it in front of you.

Robert Armstrong (2:48)

I do.

Katie Martin (2:48)

You know that you're-

Robert Armstrong (2:49)

I make it my business to have numbers in front of me. This is the business we have chosen, Katie. We're in the numbers business.

Katie Martin (2:57)

Point is, market no likey guilts. Also, market no likey sterling. So there's a slightly kind of oversized drop in UK government bonds and in sterling. And that sterling element tells you that there is a bit of a kind of pullback from UK risk. Here's my point though. If you are one of these people who's got a chart in front of you showing you UK yields and US yields, they go absolutely hand in hand. So to my mind, really what's happening here is that the US bond market is moving. US government bonds are weakening. That means that the yield is going up. So as usual, all roads lead back to the US. This is the only thing that matters. Rob, tell us like, why are US government bonds falling?

Robert Armstrong (3:41)

First point, US economy continues to astound. We had a jobs report on Friday that was much stronger than expected. And that is just the latest signal that the US economy continues to grow above its long-term trend. So trend growth in the United States is somewhere between 1 and 2%.

Like if you look at the population and et cetera, all the usual economic inputs, that would be normal growth, sustainable growth in the United States. And we continue to chug along at between 2.5 and 3% at a time when the rest of the world is not growing above trend. So the difference between the US economy and the rest of the world continues to grow.

Katie Martin (4:30)

And that means the dollar pushes higher.