At the end of last week something happened in my home country the UK which has become familiar in that the bond market came under pressure again. The headline act was towards the longer end as the 30-year yield rose to 5.57%.
The UK 30-Year Gilt yield increased by 14 basis points over the week, reaching its highest closing level in over 27 years. (@sunchartist)
His chart is below for those who prefer the visual version.
Now this rather collides with a recent event because earlier this month we saw this from the Bank of England.
At its meeting ending on 6 August 2025, the MPC voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 4%, rather than maintaining it at 4.25%.
The spread between the 30-year and Bank Rate has therefore widened again to over 1.5%. If we stay with the Bank of England this is something which has wrong-footed it. To show this let me take you back to February 11th and the words of Catherine Mann.
Along the way, I will discuss the disaggregated data that underpin my assessment of current and prospective economic and financial conditions which led me to vote for an ‘activist’ 50 basis point cut,
She did not appear to realise that her U-Turn from being an interest-rate increase fan to a cutting fan might make people wonder about her? But there was a more crucial point which I have highlighted below.
In looking at financial conditions indices, for example the one in Chart 11, it seemed to me that the two quarter-point cuts last year had not appreciably loosened financial conditions.
By “financial conditions” she meant bond yields and that was conformed by this.
I looked at the yield curve that was incorporated into the [BoE’s February] forecast: it was higher than November.
The problem here is that the policy she thought would reduce bond yields has in fact been accompanied by more rises. So we should be grateful that she did not get her way. That is really rather awkward when these people are the biggest bond investors in the UK market.
On 6 August, the stock of UK government bonds held for monetary policy purposes was £586 billion.
More on that issue later.
The UK has a 50 year bond which is a strength in the sense that it helps with overall bond maturity and it is cheaper in yield terms. For example it closed last week at 4.95%. Why is it cheaper? Because for pension funds and the like it is the best hedge and thus they buy there rather than at the 30-year. We have 2071 and 2073 bonds at the moment and around £36 billion is in issue. Plus £7 billion of a 2073 index linker.
So a strength looks a weakness as our 30-year is always an expensive point on our curve. Thus we are in a poor position but not as poor as literal international comparisons make us look.
Japan
We get another context by looking at my subject of Friday and the 30-year here closed today at 3.12%. So in absolute terms much cheaper than the UK but in relative terms there are two other contexts. For the Japanese so used to negative and zero bond yields in The Lost Decade these must feel so high. Also relative to an official interest-rate of 0.5% that is quite a yield curve.
France
La Belle France has come under pressure too. Below is the Financial Times from over the weekend.
France’s long-term borrowing costs are converging with Italy’s for the first time since the global financial crisis, as nervous bond investors put the EU’s second-biggest economy on a level with a country that has been one of its most troubled borrowers.
Sadly the FT thinks the 10-year is long-term or maybe a 30-year yield closing lost week at 4.31% is all too much for one of its favourites. For those wondering Italy was 4.52%. So whilst cheaper than the UK in absolute terms in relative terms France got used to many negative bond yields so this is a shock.Also we again see quite a yield curve as we are comparing to the official ECB Deposit Rate of 2%.
QT
One big factor in all of this mostly gets ignored because the media does not understand it and below is the worlds major central bank the US Federal Reserve.
The FOMC began reducing its securities holdings in June 2022 and, since then, has continued to implement its plan for significantly reducing the size of the Federal Reserve’s balance sheet in a predictable manner. Over the second half of last year, the FOMC reduced the size of the Federal
Reserve’s balance sheet with redemption caps of $25 billion per month on Treasury securities and $35 billion per month on agency debt and agency mortgage-backed securities (MBS) ( February Report to Congress)
In basic terms the central bankers are selling in their own bond markets. If all the buying reduced bond yields it is pretty clear what selling will do.. We are seeing the ECB let bonds mature without replacement and the Bank of England is doing that as well as selling some from time to time. Even the Bank of Japan is buying fewer than it used to as it tries to navigate its way out of its own Black Hole.
Fiscal Policy
This is incredibly lax across the world and no end appears to be in sight. The Report to Congress I just quoted also had this.
In fiscal 2024, the budget deficit was 6.4 percent of GDP—notably larger than in the years before the pandemic—as noninterest outlays continued to outpace receipts and as the cost of debt service increased as a result of higher
interest rates and a higher level of debt.
So rather than trimming the fiscal sails politicians have continued to spend. Whilst there are policy differences between President Biden and President Trump they both sing along with this.
The minute you walked in the joint
I could see you were a man of distinction
A real big spender. ( Shirley Bassey)
Which leads to this.
As a result of the fiscal support enacted early in the pandemic, federal debt held by the public jumped during the pandemic, reaching nearly 100 percent of GDP in early 2021—the highestdebt-to-GDP ratio since 1946—and has only edged lower since then (figure 31). The debt-to-GDP
ratio has been about flat since then…..
You may note the way official US bodies refer to debt held by the public which flatters international comparisons made by the unwary as it excludes the holdings of the Federal Reserve. But the overall picture is why it has a 30-year yield of 4.9%.
Comment
As you can see loose fiscal policy has been reinforced by central banks adding to the issuance pressure by removing some of their own holdings. This has been a worldwide trend and as I have pointed out before our political class continue to act as if we remain in a world of zero and indeed negative bond yields. Thus they make more spending commitments and borrow more. The fiscal metrics then look worse via the high debt yields that are required to pay for it which I have described in the past as a snow ball rolling down a hill as it gets larger and larger.
I have not emphasised the role of inflation because I see it as part of the fiscal issue which is clearly inflationary. So the higher yields represent a combination of the two factors.
What could change things? As our political class seem divorced from reality then it only really leaves central banks stopping QT. That would require more changes to their accounting “rules” to in some way delete the losses. But even they have balked at that so far…..
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