US Bonds
“The higher cost of capital that governments are paying to source long-term money reflects bond market anxieties about the state of public finances.
Investors fret about the tsunami of debt governments will have to issue to pay for politicians’ promises. So, while credit spreads on corporate bonds have indeed tightened, the extra interest rate margin governments must pay on long-dated debt relative to the cash rate has widened.
The two dynamics are likely intertwined.
It is this column’s view that markets are effectively shifting required returns from the private to the public sector. One of the consequences of the pandemic was precisely this risk-transfer process: governments racked up massive amounts of debt to (questionably) transfer this money to businesses and households. The improvement in private-sector balance sheets was matched by a striking deterioration in public finances.
And politicians have developed a propensity for trying to spend as much as possible to financially corrupt voters to continuously re-elect them. It is obviously not a tenable long-run strategy. Eventually, taxpayers will have to pay a financial price for all this imprudence.
…. This year, we have seen bond vigilantes engaged in an arm-wrestle with spendthrift governments, seeking to punish profligate politicians when the pork-barrelling is running out of control. Yields on 30-year UK government bonds have jumped by more than 100 basis points to the highest levels seen since the 1990s due to fears about the state of Britain’s budget. Similar apprehensions exist regarding France’s finances and the relentlessly reckless Victorian government.
