The UK government paid the highest interest rate on a benchmark ten-year gilt issue in almost two decades last week, borrowing at over 5 per cent, according to This Is Money columnist Hamish McRae. It was the highest rate paid on a ten-year gilt since 2007.
McRae argued the milestone matters more than the week's bigger headline, Moderna's shares nearly doubling on the back of a successful drug trial. Moderna's stock remains at less than half the price it traded at in 2021, when the company released its Covid-19 vaccine, while the gilt market move went largely unnoticed outside financial circles.
McRae pointed to a wider sell-off in long-dated bonds. Thirty-year UK gilts are now yielding 5.8 per cent, the highest level since 1998. Anyone who bought them in 2020, when yields were below 1 per cent, would have lost two-thirds of their money, since bond values move in the opposite direction to their yields.
Bessent's intervention in US debt markets
On Wednesday, US Treasury Secretary Scott Bessent intervened directly in the market, buying 30-year US government debt to push its price up and its yield down. The move was a surprise and worked briefly, McRae wrote, but by Friday yields had returned to roughly where they started the week, above 5.25 per cent, the highest since 2007.
McRae said the episode illustrated a broader lesson: intervention by governments or central banks in bond markets usually does not work for long. He noted governments can buy back debt, but questioned where the money for that comes from. The US Treasury holds some cash balances, he wrote, but will ultimately have to borrow more, likely by issuing further short-term three-month or six-month debt.
Lessons from 1985 and 1992
McRae drew on two historical examples of market intervention. The first was the 1985 Plaza Accord, when the dollar had climbed so high against other currencies that it was making American goods too expensive and driving a large US trade deficit, particularly with Japan and West Germany. Central bank governors from the United States, United Kingdom, Japan, France and West Germany met at New York's Plaza Hotel, agreed the dollar was overvalued, and intervened by selling dollars and buying other currencies. The dollar fell, the mark and yen rose, and a feared trade war was averted.
McRae said that intervention worked mainly because markets already believed the dollar was due to fall, meaning the timing reinforced a shift that was already coming.
His example of intervention failing was Britain's defence of sterling in 1992, before the currency was forced out of the European Exchange Rate Mechanism. Billions of pounds in gold and foreign exchange reserves were spent trying to keep sterling linked to the German mark, the French franc and other currencies. Investor George Soros, dubbed "the man who broke the Bank of England," was among the main beneficiaries, making £1 billion betting against the pound.
What could bring yields down
McRae wrote that bond yields would ultimately fall only through a combination of governments cutting their deficits and central banks bringing inflation down, adding that neither looked likely at present.
He pointed to growing pressure to raise private sector funding for data centres to power the artificial intelligence boom, which is competing with governments' need to find money for ageing populations and rebuilding their militaries. He said inflationary pressure was rising too.
McRae described the situation as the early stages of a battle between governments seeking to raise funds and investors growing more sceptical of their ability to control spending and cut deficits. He said he backed the markets in that contest and expected bond yields to rise further before eventually coming back down.
