Latest / Merryn Talks Money / A Discomforting Signal From the UK Bond Market and Budget, Budget, Budget!

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A Discomforting Signal From the UK Bond Market and Budget, Budget, Budget! · Merryn Talks Money

• 0:03
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Hello, welcome to the
• 0:20
  Speaker 1: Merton Talks Money weekly round up, our debrief on the
• 0:23
  Speaker 1: biggest stories in markets and economics. I'm join Stepick, senior
• 0:27
  Speaker 1: reporter and author of the Money Distilled newsletter, and I'm
• 0:30
  Speaker 1: taking the lead this week while Merton's out in Japan.
• 0:33
  Speaker 1: You lucky things, but with me, it's someone arguably just
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  Speaker 1: as exciting. That is Marcus Ashworth, Bloomberg opinion columnist. Hello Marcus.
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  Speaker 1: Hello John, So Marx, I was late to hear that
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  Speaker 1: you could join me today for our chat because I
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  Speaker 1: want to talk about your areo of expertise, which is
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  Speaker 1: the bond market, the mysterious bond market, and all the
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  Speaker 1: trouble that it causes for both our own politicians and
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  Speaker 1: the world in general. And I thought we just have
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  Speaker 1: had a chat about what's been going because one of
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  Speaker 1: the things that's happened this week other people have noticed
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  Speaker 1: this week, and you noticed a while ago, is that
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  Speaker 1: UK guilt yields have crossed above the yields or US
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  Speaker 1: treasuries for the first time in quite a while. And
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  Speaker 1: it's quite a real thing to happen. So do you
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  Speaker 1: want to explain what that actually means.
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  Speaker 2: First of all, clearly the obvious rationale is that the
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  Speaker 2: Bank of England has been a calctrum to ever lowering
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  Speaker 2: into straights off. The Fed's very aggressive, you can call
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  Speaker 2: it now after looking back on those payil numbers, that
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  Speaker 2: they are not going to cut interest rates as quickly
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  Speaker 2: as as a FED clearly wants to in a signal
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  Speaker 2: with a fifty basis points move.
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  Speaker 1: Just for context here, So the Federal Reserve the last
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  Speaker 1: time that it cut interest rates, so last month it
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  Speaker 1: cut interest rates by half a percentage point and everyone
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  Speaker 1: was kind of surprised by that, a bit poinchy. And
• 1:57
  Speaker 1: then the Bank of England had only cut by a
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  Speaker 1: quarter point and also rap until sent me up until
• 2:02
  Speaker 1: last week, up until it's all with a fit Andrew
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  Speaker 1: Bailey has been a bit kigia. But whether we would
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  Speaker 1: cut eats a cohesivelly is that that's basically.
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  Speaker 2: It, yes, though of course, in classic Andrew Bailey form,
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  Speaker 2: he then completely volt fast and article on Guardian basically
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  Speaker 2: talked about being more active and all that sort of
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  Speaker 2: good stuff. So and then the US non farm PERI
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  Speaker 2: number for the month of September released at the beginning
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  Speaker 2: of October showed that the fact that the US economy
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  Speaker 2: is actually really quite strong, and everyone's gone headfaked again.
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  Speaker 2: So we're fitting sick. We've been on a roller coaster.
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  Speaker 2: We want to get off. But at the moment, the
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  Speaker 2: thesis is probably the Federals will cut interest rates more aggressively.
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  Speaker 2: Probably in the Bank Ofing will So that's one basis
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  Speaker 2: on the guilt market yielding across the curve largely higher
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  Speaker 2: than US treasuries. Interest rates are not a similar as
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  Speaker 2: far as official rates concerned. Why are UK yields yielding more?
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  Speaker 2: And there's the potential therefore of increased supply. And really
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  Speaker 2: what we're all worrying about is October thirtieth, which is
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  Speaker 2: what Racial Reason's budget will be, and whether or not to
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  Speaker 2: increase the guilt remits how much the government borrows each year.
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  Speaker 2: Pegged at two hundred and seventy eight billion pounds this year,
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  Speaker 2: tepically not the largest number ever, However, it is really
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  Speaker 2: the biggest number ever because the banking is not buying
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  Speaker 2: guilts as it once did, It is now selling guilts
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  Speaker 2: netnet net. Is they increased that number anymore? Oh my god,
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  Speaker 2: who's going to buy this thing? Therefore interest rates and
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  Speaker 2: overall borrowing which reflects on all corporates which are the
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  Speaker 2: spread above. It's not good and I think that's something
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  Speaker 2: which I write about, as you mentioned a few weeks back,
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  Speaker 2: saying that we knew what happened with There's trust. In
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  Speaker 2: twenty twenty two or two years on from that, have
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  Speaker 2: we learned the lesson? Well, you know, labor needs to
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  Speaker 2: bear that very much in mind. If they rejig the
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  Speaker 2: fiscal rules, which broadly I think is probably right to do,
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  Speaker 2: but doesn't mean they have to take full advantage of
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  Speaker 2: them straight away. If they start increasing borrowing dramatically, we
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  Speaker 2: could have another mini type of scare.
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  Speaker 1: To unpack a couple of things they are. So first
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  Speaker 1: of all, what what you're you're saying there is and
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  Speaker 1: I think often normal people if you like, forget this,
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  Speaker 1: But the government bond market is a market like any other.
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  Speaker 1: This this supply matters as much as anything else. And
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  Speaker 1: at the moment, as you say, if the government's kind
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  Speaker 1: of borrowing more money and therefore haven't a right more
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  Speaker 1: io use, And then on top of that, the Bank
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  Speaker 1: England is selling off the IOUs that it was previously buying,
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  Speaker 1: then that means the amount iouse hitting the market is
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  Speaker 1: much much bigger.
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  Speaker 2: Sometimes it doesn't matter, you can sell ever more. In
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  Speaker 2: fact that you can't, please please tell more. Sometimes no
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  Speaker 2: one wants anything. And the risk is it it's surprise
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  Speaker 2: if all of a sudden the labor government taxes us more,
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  Speaker 2: spends more, and also borrows more all through at the
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  Speaker 2: same time. That's a bit of schockun awe, which you know,
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  Speaker 2: where would be the weakest point. We're all flinch and
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  Speaker 2: go or I won't, I won't spend as much, and
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  Speaker 2: maybe you know, the economy will take a bit of
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  Speaker 2: a shudder. But the first and quickest and nastiest reaction
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  Speaker 2: will come from the bomb market, because they'll go, hang
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  Speaker 2: on second, you want us to buy more of your debt, well,
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  Speaker 2: we won't unless he pay us more money for it instantly,
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  Speaker 2: And that's what happened with Liz Truss and the mini budget,
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  Speaker 2: you know, two years ago. Instantly there was there was
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  Speaker 2: a shock reaction. So I'm not saying it's going to happen.
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  Speaker 2: I hope it doesn't happen. I hope that Treasury and
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  Speaker 2: the government have done all the sort of numbers and
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  Speaker 2: do this carefully but it's definitely something one of the
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  Speaker 2: main reasons, not the only reason why we are charged
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  Speaker 2: more for our debt in this country than say the
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  Speaker 2: US government's happening for a little while actually happened doesn't
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  Speaker 2: lead up the election. I do blame blames the wrong word,
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  Speaker 2: but that core point here is that the early care
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  Speaker 2: of the election, that's exactly when the spread side and
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  Speaker 2: move borrowing cost god grows up in the UK compared
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  Speaker 2: to the US. So you cannot not put it on
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  Speaker 2: the fact that there's a new government coming in and
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  Speaker 2: is expected to borrow more. There's definitely that's the rationale
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  Speaker 2: between relatively between the US and US. Whatever the Bank
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  Speaker 2: of England does on interistrates is what's a mystery at
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  Speaker 2: all of us, including the Bank of England. But coming
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  Speaker 2: back on that a second, but also at the same point,
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  Speaker 2: yields have been dropping in Europe, particularly in Germany, because
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  Speaker 2: they're going into a real state of recession potentially deflation
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  Speaker 2: the aspects coming there. So now we now look even
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  Speaker 2: worse compared to Germany and the rest of Europe as well,
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  Speaker 2: so find effect.
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  Speaker 1: To be feitl I mean that it's partly because I
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  Speaker 1: think this is the other thing that people will personably
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  Speaker 1: like normal people make fing the bit confused and at
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  Speaker 1: the end of the day them in bordering course are
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  Speaker 1: going down because the German ecoinomy this is not good.
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  Speaker 1: It's not a good thing. And so presumably the coin
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  Speaker 1: shines between you Yuki and German yields is somewhat more
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  Speaker 1: to do.
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  Speaker 2: Point, do not think it's all bad UK quite the
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  Speaker 2: reverse in this sense. You know it's but nonetheless who's
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  Speaker 2: paying the most to borrow money? It's us. Is that
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  Speaker 2: something which couldn't should pass possibly, but a lot of
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  Speaker 2: bit of fear and where we're coming into the October
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  Speaker 2: thirtieth date. Once that passes, I don't think you'll be
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  Speaker 2: able to do And like what certain newspapers have been
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  Speaker 2: have been scaring as all could possibly happen. But the
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  Speaker 2: risk of less taxes on us as individuals is more
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  Speaker 2: borrowing as overall as the tax payer, and that could
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  Speaker 2: be a longer term, you know, much more worrying for it.
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  Speaker 2: So keep it in mind.
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  Speaker 1: So there's the actual numbers, but then there's what that
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  Speaker 1: actually can what they're doing this for. So in terms
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  Speaker 1: of the creator bellity, a lot of it presumably is
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  Speaker 1: about is this plan a good point or is it
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  Speaker 1: a bad wine? Like if they come out and say
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  Speaker 1: we're going to steff all we're gonna if it's sounds
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  Speaker 1: like it's an ideological attempt to steff the rich, then
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  Speaker 1: that will have a wash reaction. Then if actually we're
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  Speaker 1: trying to INVESTI grow the economy, is that fair to say.
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  Speaker 2: What this this is where the burden gets shit? So
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  Speaker 2: will it be bang bang bang non doms get you know,
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  Speaker 2: heavily hit cabble gains tax. It doesn't really matter what
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  Speaker 2: it is. But if it's a one off and they
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  Speaker 2: say very clearly right, that's the poison, take your medicine
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  Speaker 2: when we move on, I don't think that ables do that.
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  Speaker 2: I think because they've they've dragged this out for so
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  Speaker 2: long and made this whole October thirties being the uh,
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  Speaker 2: it's create a situation. Now they're going to have to
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  Speaker 2: go in increments and that's almost worse because I think
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  Speaker 2: then that then no one knows that the ends to
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  Speaker 2: be taken them enough already and we can move on
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  Speaker 2: the bigger It's as like you're going going back to
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  Speaker 2: is if they increase the borrowing on the government bomb
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  Speaker 2: market and build market to soak up what they can't
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  Speaker 2: do on taxes. That will affect how much we borrow
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  Speaker 2: and how much do everything costs. As I said, two
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  Speaker 2: hundred and seventy eight billion is a large amount of money,
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  Speaker 2: but it's going to only go to increase in the
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  Speaker 2: next two or three years, and it could increase substantially,
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  Speaker 2: and that could unsustainable. We could have a difficult situation
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  Speaker 2: where the start of a new government that the bomb
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  Speaker 2: markets are saying, no, that's really what they don't want
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  Speaker 2: to go into. So I'm not saying it's going to happen.
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  Speaker 2: I sincerely have it won't happen, And I hope they're
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  Speaker 2: just picking up the spody census here to be a
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  Speaker 2: little bit careful when they change the fiscal rules they're
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  Speaker 2: evidently going to go to and look, the Bank of
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  Speaker 2: Ang's got out their way a bit. I don't want
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  Speaker 2: to get into the very exciting subject of actually quantitative
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  Speaker 2: tiny eye bond cells by the Bank of but they
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  Speaker 2: have backed off. Yes, yes, if the bank having cuts
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  Speaker 2: into straits, which they really should helper Man, we can
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  Speaker 2: all go over this. And I think October thirty probably
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  Speaker 2: will end up being one of those events which aren't
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  Speaker 2: anywhere near as where as as we built it up
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  Speaker 2: to me presumably.
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  Speaker 1: The other thing is that there isn't the same led
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  Speaker 1: A problem because les trust blundered something. It wasn't just
• 10:16
  Speaker 1: because she didn't speak to the WIBR. I mean one
• 10:19
  Speaker 1: reason that you know, Rachel Reeves has had did the
• 10:22
  Speaker 1: lead a boutet for so long so that the l
• 10:24
  Speaker 1: Beard will Mark at homework saw that there isn't allays
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  Speaker 1: trust moment and that's all theater.
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  Speaker 2: And I think we've got time for this. All I
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  Speaker 2: can say is that you know, for one of the
• 10:34
  Speaker 2: many things that those trust can be blamed for, and
• 10:37
  Speaker 2: I think the five words from quasi quarte there will
• 10:39
  Speaker 2: be the business can be more coming was the biggest thing.
• 10:43
  Speaker 2: You know, the earlier crisis wasn't necessarily one you can
• 10:46
  Speaker 2: blame her, But as someone said, you walk into a
• 10:49
  Speaker 2: shed of fireworks with a lit match, you know that's
• 10:52
  Speaker 2: what you get, and that's shearding the fireworks are no
• 10:54
  Speaker 2: longer their neuralless trust. But you know at that same point,
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  Speaker 2: I think you know, really at that point it's there
• 11:02
  Speaker 2: are lessons to be learned. Tears On be careful with
• 11:05
  Speaker 2: the fact that our boring cross or have already moved
• 11:08
  Speaker 2: to be so fifty basis points? Why didn't they were
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  Speaker 2: before we knew labor was going to you know, assume
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  Speaker 2: come into power and you know this will will work
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  Speaker 2: its way through if it's handled and managed properly. I'm
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  Speaker 2: sure we'll just view this as a little of a blip.
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  Speaker 2: And therefore guilts are theoretically cheap, but at the moment
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  Speaker 2: they're cheap, and they're cheap for a reason.
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  Speaker 1: Fair enough on the actual budget itself. We've been talking
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  Speaker 1: a lot about this stuff that may investors pockets in
• 11:37
  Speaker 1: the podcast over the last few weeks in terms of pensions,
• 11:41
  Speaker 1: specifically the vidious measures that they're talking here. Is that
• 11:45
  Speaker 1: anything that stands out to use something that seems lately
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  Speaker 1: it happened, Yeah, unlately.
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  Speaker 2: Harm I think you have to think fairness. We've got
• 11:52
  Speaker 2: a labor government, all right, What does socialism whatever the
• 11:58
  Speaker 2: majority of the term, But what does it mean? It
• 12:00
  Speaker 2: means that we should be socially fair? Is it right
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  Speaker 2: that a pension and I appreciate those definite, defined benefits
• 12:07
  Speaker 2: die with the end. Define contributions at the moment carry
• 12:11
  Speaker 2: forward and are not part of an individual's state. Should
• 12:15
  Speaker 2: that be the case, Probably not. I expect them to
• 12:18
  Speaker 2: put them back into everyone's in a state in that sense.
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  Speaker 2: Will they reduce the amount of annual allowance which is
• 12:26
  Speaker 2: currently been raised recently goes up to sixty thousand back
• 12:30
  Speaker 2: down again? Again? I always think that's sensible. Probably they
• 12:34
  Speaker 2: were bugs from the previous government which which we you know,
• 12:37
  Speaker 2: certain things they can reverse. The scrapping the lifetime allowance
• 12:41
  Speaker 2: they can't. There's a number of things they'll find very
• 12:43
  Speaker 2: tricky to do. Will they reduce the amount of tax
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  Speaker 2: benef we get off of top higher eate tax from
• 12:51
  Speaker 2: forty forty five percent down to something close to the
• 12:53
  Speaker 2: thirty Again, I could argue that very clearly has been fair.
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  Speaker 2: Why should a twenty percent tax payer not get as
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  Speaker 2: much benefit as a forty or that doesn't egalitarian says?
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  Speaker 1: So.
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  Speaker 2: I think they'll probably do things like that.
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  Speaker 1: But the triggering of that one is that it hits
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  Speaker 1: the public sector as well, doesn't. I know it does
• 13:15
  Speaker 1: because the tax relief side of things on on a
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  Speaker 1: dB pension, if you if you.
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  Speaker 2: Know that, you know everyone gets treated equally. It doesn't.
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  Speaker 2: That's the one going about a quality here?
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  Speaker 1: Oh no, No, But what I mean is if you
• 13:30
  Speaker 1: end up it's one thing you say you're going to
• 13:33
  Speaker 1: take it away from private sector workers, but extend yourself
• 13:37
  Speaker 1: up from a mass quite that blagant.
• 13:39
  Speaker 2: They are backed by the unions, they are paid by
• 13:41
  Speaker 2: the unions many many ways, and yes the public section
• 13:44
  Speaker 2: is are the most powerful, but they can't be quite.
• 13:48
  Speaker 1: Surely, I'm impressed with you.
• 13:50
  Speaker 2: Did you say they're going to do that? Then? Really,
• 13:52
  Speaker 2: then what's the point.
• 13:52
  Speaker 1: Do we say? But I mean the annual allowance was
• 13:54
  Speaker 1: all changed loudely because surgeons and doctors were complaining about
• 13:58
  Speaker 1: having to leave for various reason and.
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  Speaker 2: That was bad, which I think they were.
• 14:03
  Speaker 1: Look what I'm saying is did they really want and
• 14:08
  Speaker 1: peck another fate with the nastias and the doctors like.
• 14:12
  Speaker 2: The fight with the rest of the world, the rest
• 14:14
  Speaker 2: of the economy, the private sector, I don't think. See
• 14:19
  Speaker 2: what the pensions are and hugely generous. Reducing the amount
• 14:25
  Speaker 2: that the higher rate taxpayers get down to a lower
• 14:29
  Speaker 2: level to equate them with lower rate taxpayers, I would
• 14:32
  Speaker 2: say would be fair and they could get they get
• 14:34
  Speaker 2: away with that, They could justify that rightly. Certain things
• 14:38
  Speaker 2: which I think they'll have real problems with, for instance,
• 14:40
  Speaker 2: luring them out that you can get as a tax
• 14:44
  Speaker 2: free cash s which is currently two and sixty eight thousands,
• 14:48
  Speaker 2: a random number which hasn't changed for a long while.
• 14:50
  Speaker 2: It was a course of what was the old lifetime allowance.
• 14:52
  Speaker 2: I think again that's breaching people's trust. When you created
• 14:57
  Speaker 2: a pension, you put all your money into it, you
• 14:59
  Speaker 2: always bankes on having a quarter of that tax free
• 15:01
  Speaker 2: to pay off a residual mortgage or whatever it may be.
• 15:05
  Speaker 2: To take that away I think would be retroactive, respectively,
• 15:09
  Speaker 2: gregeously unfair, and I really hope they won't do that
• 15:12
  Speaker 2: because that couldn't be justified. I don't think in any
• 15:15
  Speaker 2: sense of egalitarian firm so you know do I think
• 15:18
  Speaker 2: they'll raise capital gains tax, perhaps the square away a
• 15:21
  Speaker 2: little bit with private equi's carried interests, which is currently
• 15:24
  Speaker 2: tax or the top rated capal gains tax at around
• 15:27
  Speaker 2: twenty eight should it be forty five or yes, we
• 15:30
  Speaker 2: all know it should be forty five? I can you
• 15:31
  Speaker 2: don't want big step? No, could you move the cabal
• 15:35
  Speaker 2: gains tax and match that with where Karen inter just
• 15:37
  Speaker 2: get Yes? Probably I can see them doing things like that,
• 15:40
  Speaker 2: but they've got to be careful on doing too much
• 15:42
  Speaker 2: too soon. The tax going in the UK is obviously
• 15:46
  Speaker 2: extumely complex and the knock on unintended consequences here are vast,
• 15:52
  Speaker 2: So there's certain things I can do, they could argue.
• 15:53
  Speaker 2: I think in a galatarian fair way, most people who
• 15:58
  Speaker 2: are getting forty percent tax relief on the only getting
• 16:01
  Speaker 2: thirty three will they'll stop putting money in the pinion.
• 16:04
  Speaker 2: Of course they would, so I think that's probably what
• 16:07
  Speaker 2: they'll end up doing common sense.
• 16:09
  Speaker 1: I hope that is a that's a fascinating one. That
• 16:12
  Speaker 1: is a fascinating one. Thank you very much, Marcus. Thanks
• 16:21
  Speaker 1: for listening to this week's Merden Talks Money debrief with me.
• 16:25
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