Do bond markets care anymore about deficits?

Do bond markets care anymore about deficits?
Written by:
Damian Wood
22nd November 2019
  • The UK bond market no longer cares about deficits, experts say
  • Both the opposition and ruling parties are banking on heavy borrowing to finance ambitious projects if they clinch the top seat
  • Government bonds are known to have very low yields

The UK’s official opposition leader Jeremy Corbyn on Thursday unveiled his manifesto full of mega investments that he plans to fund through debt capital should he clinch the top seat in the coming elections. But the UK bond market has been surprisingly silent about the leader’s intentions even as he hopes to win the UK’s hotly contested premiership seat.

Investors haven’t shown any signs of panic over being asked to pay for the huge projects in Corbyn’s manifesto, considering that government bond yields are some of the lowest all around the world.

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Fund managers have been warning that the move could inflate the government debt leading to a high cost of borrowing.

According to some key market figures, part of the reason why the market has remained calm is perhaps because of the low probability of Corbyn winning the elections; otherwise, the bond market vigilantes wouldn’t just turn into socialists overnight, would they?

But perhaps this could also be a sign of a changing bond market: a sign that the market simply doesn’t care about deficits. And the ruling party is also planning to go on a spending spree, with the public debt having jumped to a five-year high by last month.

While the UK’s mood toward bonds may come as a surprise to many, other countries with negative sovereign bond yields are practically protesting to have their governments borrow. Normally, such are signs of a post-crisis economy where policymakers try everything possible to stimulate the economy as fiscal authorities tighten their grips. In this case, the monetary policymakers slash interest rates and central banks take up a significant portion of the government bonds market.

However, word on the street has it that investors are shifting their focus to fiscal policy and away from a “pivot” one. We’re unlikely to see calls for fiscal retrain in the coming US elections, especially if President Trump faces off with Elizabeth Warren.

Countries like German that are known for recording budget surplus are now coming under fire both locally and overseas.

Now, if indeed sweeping change is here, you can rest assured that the UK will become the testing bed for other countries.

Finally: Do you think the UK bond market can absorb another round of heavy borrowing with the current budget deficit coupled with a grisly exit from the EU?

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