In truth they never went away, but after Truss there is a danger that they will be taken more seriously. The FT recently published a classic of its kind, entitled “Gilt investors urge Reeves to keep investment ambitions in check”. The subheading read “Markets on edge ahead of overhaul of fiscal rules that could result in tens of billions of pounds of extra borrowing capacity”. Sounds scary, but worse is to come.
The article warns that Reeves may “bump up against tight constraints in the bond market as investors warn they have a limited appetite for fresh UK debt”. One trader suggested that anything more than £10bn to £20bn in additional borrowing could “push gilts over the edge”. The language of ‘constraints’, ’on edge’ or ‘over the edge’, and ’limited appetite’ all suggest the potential of a crisis where the government can no longer sell its debt.
As a result of this and other similar articles, I have seen plenty of pieces from political commentators warning that the budget might ‘spook the bond market’. This suggestion, along with the accompanying language, is complete and utter nonsense. The idea that if Reeves wanted to borrow an extra £30 billion, say, the markets would refuse to lend that to the UK government is just ludicrous. Reeves will not bump up against any constraints from the bond market for anything she is realistically likely to do.
What is possible is that a lot of extra borrowing might lead lenders to the UK government requiring a better interest rate. But this has little to do with supply and demand for UK government debt, and instead reflects expectations about what the Bank of England might do in the future (‘arbitrage’). If additional borrowing is associated with additional
