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When bond markets get sticky, it doesn’t help to be the ugliest horse in the glue factory. Unfortunately, that is the role the UK is currently playing.

It’s been an ugly start to the year for global bonds, but again contrary to what sharp analysts and professional investors say we expect for 2025. From the US to Japan, and almost everywhere in between , the developed market government. Bond prices fell, pushing yields and borrowing costs higher – a blow for countries that flock to investors in search of funding.

The UK, however, has the unhappy distinction of suffering more than most, and given the recent memory of the 2022 gilts crisis, alarm bells are ringing. A strange new wrinkle appeared in that story this week, when the prime minister from the short-term grace, Liz Truss, declared through her lawyers that it would be unfair to suggest that he destroyed the economy at that time. This is a strange move, and one that shows a bad familiarity with Streisand Effect.

In any case, the urgent question is whether we are at the beginning of a new one gilts flame The short answer, I think, is no. The longer answer is: it is largely out of the hands of UK policy makers.

To be clear, the fall in gilts this week is a serious episode. Not all, but many investors have been cooling off on UK debt for some time, fearing signs of continued inflation that will make it difficult for the Bank of England to continue cutting interest rates. Ten-year yields have been pushed up by about half a percentage point since the new government’s Budget at the end of October. That’s a fair chunk of bond ground, representing a big drop in prices and including some big drops in the opening days of this week to get long-term yields to the max. highest since 1998.

More alarmingly, perhaps, sterling also took a knock, suggesting that this is not just a case of investors recalibrating their view about what the BoE does next and when, but a run away from the risk of the UK being too broad. (Even the Gregg’s share price has hit the skids, and if you can’t bet Brits can find pennies for steak bakes and sausage rolls, something’s wrong.)

Declaring the gilts shake-out a new crisis fits the political agenda of some observers. But the context here is important. Overall, stocks have been up this young year so far, not down, reflecting the tight relationship between the FTSE 100 index, which is loaded with overseas earnings, and a weak pound. . The same is not true in 2022, when the FTSE is smoked. Yes, the half-point rise in 10-year gilt yields has been a lot since the Budget. But in 2022, they jump more than that by three days. The two things are never the same. And the pound is weaker, sure, but so is the euro, the yen, etc. besides the strong dollar.

That’s the key here. The real story is a global rise in bond yields as the US economy continues to bulldoze ahead of other developed countries and inflation remains above target. In the middle of December, the Featured by the Federal Reserve cutting rates isn’t as easy as investors once thought. A few weeks ago, markets reflected expectations that the Fed would cut interest rates several times in the opening months of this year. Now we are looking at a summer chop, maybe, and maybe another one later. Surprisingly strong US jobs data on Friday added even more fuel here.

US bond yields, which have a lot of gravity in the rest of the world’s debt markets, are also rising. US 10-year benchmark yields have gained roughly 0.2 percentage points so far this year, and that’s throwing the rest of the market out of harm’s way. The UK is in the crosshairs because the weaker gilts are boxing chancellor Rachel Reeves in an awkward place where she has to cut spending or raise taxes. But yields in fiscally austere Germany rose to similar levels in the UK without causing much fuss.

Aside from the continued performance of the US economy, global pressure on bonds comes from what Nobel Prize-winning economist Paul Krugman described this week as a “madness premium” in US bond yields.

“A rise in long-term rates, such as the 10-year Treasury rate, could reflect a nagging, creeping suspicion that Donald Trump actually believes the crazy things he says about economic policy and will act. of beliefs,” Krugman wrote on his blog, a reference to high trade tariffs, tax cuts and potential mass deportations that point to a renewed surge in inflation. in the US.

So what can stop the decay? My sense is it stopped on its own. US bonds will no longer slide in price once they begin to represent an irresistible bargain for investors. This is likely if and only if the 10-year yield is close to 5 percent, up from around 4.8 today. The same is true for the UK, which for all its misfortunes, has gone into default on its debt. Big round numbers, in this case five, have a strong tendency to hammer that message home.

But the dismal scenes on the bond trading floors this week, for Reeves and for the rest of us, are a reminder that the US is driving the car for developed markets. We are only passengers and must hope that it is prudent.

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