Just when you thought it was safe to take a step back into the gilt market… it’s getting nervous again.
Around lunchtime on Friday, the odds on Boris Johnson winning the Conservative leadership battle shortened rapidly.
For a moment, the former Prime Minister was the favorite on Betfair’s betting markets to become the next Prime Minister.
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What happened next was exciting.
The interest rate on Britain’s national debt rose quite rapidly. In the space of a few minutes, the yield on two-year bonds rose from about 3.7% to just under 3.9%.
In the schedule of the last few weeks, there are not exactly any huge movements; once again, the past few weeks have been unlike anything we’ve seen in government bond markets in a generation.
In the following hours Mr. Johnson’s odds were extended again; he went back from being the favorite in the betting markets to trailing Rishi Sunak, who has led them from early on. And, almost in lockstep, Britain’s borrowing costs also fell.
A mug game
Now markets are tricky things to interpret. The prices we see there are the result of millions of decisions made by millions of investors around the world. Trying to find direct cause and effect on a single move is a mug’s game.
And there’s a lot happening elsewhere: we recently learned that Germany’s government is approving a plan to lift its limit on how much debt it can issue, paving the way for issuing an additional €200 billion in bonds; there are rumors that the European Central Bank is continuing with its plans to sell off billions of euros in bonds to the market. So these bonds move a lot.
Even so: the development of the UK national debt was significantly sharper than anything we saw elsewhere.
There was something UK-specific going on here, and five independent bond traders have told Sky News the move looked as if it was being driven by Mr Johnson’s improved odds.
Some put it down to fears that Mr Johnson would replace the new chancellor, Jeremy Hunt, and abandon his fiscal plan.
Some said it could be due to fears that he would struggle to gain a majority in parliament, and the consequent risk of an early election, with all the chaos that might entail.
However, there is a broader lesson.
The markets are still very nervous
Since Monday, following Mr Hunt’s reversal of most of the mini-budget, gold markets had been relatively calm. The chaos of previous weeks, which saw many funds that the pension systems rely on teeter on the brink of insolvency and a sharp rise in mortgage costs, had finally subsided.
Friday’s disruption may be short-lived, but it’s a reminder that markets are still very nervous. And every movement in government bonds is not an abstract event; these markets determine all sorts of other prices and signals throughout the market.
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Consider: the move in the gold markets at lunchtime pushed up the expected Bank of England rate for May next year from around 5.1% to more than 5.25%. So there are consequences, which play out on the public finances of households around the country.
All of which is to say that in the coming days, as the Tory leadership battle reaches its climax, things could get bumpy again.
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