After months of registering mild but persistent disapproval of Western governments, the bond vigilantes came out in force at the end of last week. Friday’s sell-off was especially brutal, with the interest rates on Government debt rising between 0.1% and 0.2%, depending on the country. Stocks fell in response.

The crisis in the Labour government and the possible return of Andy Burnham to national politics seemed an obvious trigger for the panic. The Mayor of Greater Manchester, who can now run in the Makerfield by-election after Labour MP Josh Simons vacated his seat, is on record saying that the Government shouldn’t be “in hock” to the bond markets. He has also floated the idea of funding increased defense spending with debt.

Although bond investors might not love Keir Starmer’s premiership, they at least consider Rachel Reeves a more prudent chancellor than most other candidates within the Labour Party. Burnham’s election isn’t a shoo-in, as he’ll have to run in a constituency where Reform UK is surging. But if he wins, he’ll become odds-on favorite to replace Starmer as party leader, and hence prime minister. It is therefore increasingly likely that the next government will be less committed to Reeves’s “ironclad” fiscal rules.

Nevertheless, if Britain has become a particular target for gilt investors, the bond market revolt is broad-based. The interest rate on the debt of all Western governments has been rising sharply — up a third of a percent in Germany since the start of the year, nearly half a percent in the US, and even more in Japan.

Several recent events have raised the blood pressure of bond investors: Japan’s fiscal loosening under its new government, Donald Trump’s pressure on the Federal Reserve to cut interest rates, and above all the resurgence of inflation due to the US fiasco in Iran. Last week’s inflation reports out of Washington provided especially hard reading.

However, the fundamental driver, common in varying degrees to all Western governments, is the seemingly endless rise in national debt. The massive increase in borrowing that happened during the Covid pandemic was meant to be a one-off that would, once business resumed, unleash a new Roaring Twenties of rapid growth that would quickly pay back debt.

That didn’t happen. After a brief post-lockdown burst, economic growth settled back down across the West. Debt kept rising. Now that interest rates are doing the same, a vicious spiral in which higher debt-servicing costs further increase debt risks is becoming entrenched

The British anomaly is therefore not the rise in interest rates, but the greater magnitude of this rise. There is apparently an extra premium attached to UK debt. When interest rates rise everywhere else, they rise by more in Britain. A Burnham premium may be accelerating this, but it’s been happening for years.

Since 2016, British politics has been chronically unstable, and the country has acquired a knack for short-lived and often unserious politicians. The basic problem is that Britons keep saying they want better public services, but also lower taxes. Politicians thus promise both by saying they’ll magically produce higher growth, or find savings that all their predecessors somehow overlooked. When, predictably, they fail to deliver on their promises, the public turns to the next purveyor of hope.

Hence the instability, and politicians making pledges they can’t fulfill, because voters don’t want to hear the realistic ones. Until they do, politicians will have no incentive to change, either. The bond vigilantes will simply take it upon themselves to demand change.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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