Strong governments must be prepared to upset the markets (a bit)

The bond markets are a potent opposition, but governments must be prepared to take risks if they are ever to reap rewards, says Charles White-Thomson

With a large majority and an election years away, the Prime Minister and Chancellor likely don’t feel the need to worry too much about what the electorate think.

But one thing they did worry about was a possible sell-off in the UK’s bond markets, as they digested the Budget ingredients – tax hikes, debt increases, modest growth peaking at two per cent in 2025, and the OBR statement to name a few. During interviews, ministers looked rattled in their response.

The yield on the UK 10-year gilt increased by 10 per cent from mid October, largely as the markets reacted to the Budget. This is a big move in bond market terms.

Higher bond yields stifle growth and increase the cost of borrowing for the UK and for individuals, including those with mortgages.

This is why the global currency, bond and equity players are a potent opposition. Their opinion and the market’s response matters, especially as the UK has £2.7 trillion of debt and will borrow more. Until nearer the next election, the opinions of the electorate are subordinate.

Unlike the official opposition, the Conservatives, the effect of the markets’ actions can be immediate and politicians are right to worry about this. Get on the wrong side of the financial markets and there can be huge problems including U-turns, or being fired from your role.

Back in the Spring, I wrote that the bond markets had hardly reacted to then Chancellor Jeremy Hunt’s Budget – and that was a problem. Back then, Hunt was effectively offering more of the same. That may have suited the bond markets, but there was no bold growth plan to unleash our prosperity.

Seven months on and we have a very different story. A sell-off in the bond market triggered by Reeves’ smash and grab, old school budget dressed up as a growth initiative, built on more tax and more debt and the worries around the impact on the economy and the cost of financing our ever-growing debt pile.

14 years of frustration, expectation and pressure boiled over into a Budget that misfired. Reeves failed to take the opportunity to supercharge the growth program and bring the country and financial markets with her in this quest.

Companies vote with their feet

Fundamental to this Budget is the misunderstanding that it is less problematic to tax companies as they do not vote – maybe not at the ballot box, but they do with their feet, decisions and future plans. And in general, taxes on business get passed on to the consumer and employees.

Looking forward, what market friction should we expect to accompany an aggressive growth plan? A small but manageable sell-off in the bond market, a rally in the equity market and currency as they price in a stronger environment, and a mixed bag of write ups from the likes of the IMF and OBR. This would be progress, and so be it, and well worth it to extract us from this doom loop.

Interestingly, we have seen now how markets react to what they are seeing as a strong growth and reform agenda with the election of President Trump. US equity futures and the USD are strong, whilst Treasuries are weak.

We need strong leaders with the gravitas and skill to deliver and successfully land an outright growth agenda, take good risks and manage the narrative and friction around these decisions. The focus will be on our ability to deliver growth and a wide reaching and successful reform agenda. This would get the support of both the electorate and the financial markets.

Charles White-Thomson is former chief executive officer at Saxo UK