Blain’s Morning Porridge, September 4^th 2024: Blow out Gilt Success confirms UK has wider options than just Austerity.

“I’ll pour this pestilence into his ear.”

 The stunning success of yesterday’s 14x covered 2040 Gilt confirms the new Labour Government has a wider range of options for the October Budget. It nails the lies fictitious “Bond Vigilantes” having been pouring in the market’s ear – the fact is the global bond market has just demonstrated confidence in Sir Kier Starmer and Rachel Reeves.

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Bill’s Pub to Club Swim:

Let me remind readers about Bill Blain’s Pub to Club Swim on September 14^th. Its a Charity Event in support of Wessex Heartbeat, the cardiac care charity.. I will be swimming 2.5 miles down the River Hamble as a thank you to the Medical Staff who care for cardiac patients and their families. You don’t have to anything except click the link – here – and make a donation.

Without Heartbeat, well, you would not be reading the Morning Porridge.

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Yesterday the UK Debt Management Office, (“DMO”), launched a new UK Government Bond, a Gilt. It was an absolute screaming success! The deal pulled in £110 bln in orders for the £8 bln of the 4.375% Jan 2040 Gilt from global investors. That’s a record volume of orders and “cover” (the ratio between the size of the bond and orders) for any Gilt issue. It was priced at a tight new issue premium of just 4 basis points over secondary bonds. (The new head of the DMO, Jessica Pulay, might be asking herself if she’d left too much on the table? Only kidding.. it was definitionally a great deal.)

It’s great news for the UK.

The deal confirms the strength of not only the UK Gilts Markets, but also the rising degree of confidence global investors have in the new UK government and the UK as an investment destination. Gilts have much in their favour – particularly on a relative basis to other national bond markets.

Critically, the deal represents a Game-Changing moment: one which the government should understand by factoring the strength of the Gilts market into its plans: the rising confidence of the market in the UK gives them a wider range of options for the October Budget.

That $22 bln black hole in the national accounts, the “there is no money left” hilariously unfunny note left by the discredited Conservative government of Rishi Sunak, could well be re-solved as a result. But only if Labour understand the opportunity. (My email is down below..)

More to the point, the 2040 Gilt success directly contradicts a stream of recent articles, posts and comments in the market press alleging Bond Vigilantes (crashing minor chords and blood-thirsty scream) threaten to impose harsh controls on the new UK government by selling the bond market on any sign of fiscal wavering by the new government. These have proved utter Bollchocks.

Bond Vigilantes are a market myth.

Throughout my whole career – next year marks 40 years in the City, most of which I’ve spent on the coal face of the bond markets, working directly with issuers and investors, and learning exactly what actually drives markets – I’ve repeatedly been told Bond Vigilantes stand ready to punish bad governments if they threaten unwise spending or borrowing. Nope. They are fairy stories.

In practice, bond investors make their buy and sell decisions on facts and need. Bond Traders look for volatility and thus opportunities to trade – events. I’ve seen bond markets dramatically sell off on rising threats of a default, a leaked devaluation, rising rates or something really stupid done by government, but seldom on rumour and sigh the “the bond market won’t like it.”

It is surprises, the no-see-ums that shake markets. Take the clearest example of bad government shocking a market – the Liz Lettuce Truss moment in 2022. She announced a growth budget (pretty much what the nation needed), but “surprised” markets by announcing unfunded tax cuts and higher spending with zero preparation, while sacking the head of Treasury who understood how markets work.

The result of the shock was an immediate collapse in confidence; a rush by traders to sell the market on the multiple unfactored budget implications. The sharp fall in Gilt prices triggered a cascade of other issues, particularly in leveraged LDI trades held by long-term investors, forcing the DMO and Bank to step into stabilise the market. That wasn’t bond vigilantism, just plain stupidity and hubris caused by defintionally bad government triggering bond market weakness.

Not a single bond vigilante in sight…

The problem is now the Truster**ck is held like a gun to the head of all government spending and borrowing plans. Its massively overplayed. What investors actually care about are the effects of inflation on their investments, interest rates on their returns and valuations, and, critically, the likelihood they will receive regular interest and be re-paid in full at maturity. (Clue – never as simple as the above paragraph suggests, but you get the drift?)

Ahead of yesterday’s Gilt success, the negative Vigilante vibe across the Gilts market has become so frequent, you’d almost think they’d been coordinated. The new Gilt’s success rather confirms my suspicions were correct: the current rumours of bond vigilantes are Tory shadows of regret. I’ve said a couple of times I suspect the folk saying these things might just be disgruntled Tory supporters who can’t quite believe, or get over, the scale of Rishi Sunak’s defeat on July 4^th.

Now, some might say deliberately undermining a nations’ bond market’s strength and  sustainability through lies, unproven rumour and sigh is high-treason, but let’s not stick anyone’s head on a spike straight away… but I’ve got a little list, a very little list of Torygraph journalists who never would be missed, yes, they’re on my little list. (Apologies G&S.)

If you want proper election denial in the UK, try the Torygraph. (I read it religiously first thing every morning to find out just what the now irrelevant enemy is thinking.) I am delighted with a new game I’ve invented: I’ve called it Torygraph Socialist Death Frenzy. To play, score the Torygraph’s headline stories, like the ones below, for just how nonsensical they are – usually 8/9 on the utter bollchocks scale. Here is a selection of Torygraph headlines this week:

• Labour has surrendered to China
• Angela Rayner is creating an economic monster that will take decades to slay
• It’s over for Britain, crushed by Labour’s cruel war on the middle classes
• Sir Keir Starmer Ate My Hamster
• Labour plotting plan to make millions tax prisoners in their own homes
• Labour’s real agenda for Britain is far more terrible than anyone imagined
• The Labour Party has become a national joke
• How Labour will take away your state pension

(Extra points – all of these are genuine Torygraph headlines.. except one.. can you guess which?)

Enough mockery of the Torygraph, they are as weird as weird and rapidly becoming the UK’s very own Trump bastion of angry regret… yet the paper is a national treasure in its own weird way. I shall miss it when it’s gone…

Back to the Gilts market…

The Vigilante posts say broadly the same thing: something along the lines that bond traders and investors are deeply, deeply concerned Labour’s claim to have discovered a $22bln hole in the national accounts is nonsense, and it’s all lies, made up to justify deep tax raids on pensioners, workers and private equity fund managers later this year in the October budget, and a glut of bond funding is planned to pay off striking state workers which will trigger inflation, therefore sell bonds.. and sell them now..

(Headsman, sharpen up your axe…)

The posts inevitably focus on the undisputed fact Sir Kier Starmer’s popularity has dropped dramatically, or photos of deputy Prime Minister Angela Rayner dancing at an Ibiza party, cited as evidence the country is in peril. (Angela gets a thumbs up from me multiple levels, not least for her clear FYTR signals and the fact she drives traditional Tories into conniptions: Northern, Single Parent, Glamourous Granny, Powerful Woman, all while showing insufficient deference for her Tory betters… Keep it up Angela!

The Vigilante threat was taken seriously by market journalists. Marcus Ashworth, one of the top financial writers in the UK today, published “Labour’s leaders are stalked by bond vigilantes.” There are always risks for any bond issuer, a fact Ashworth reminded us when he wrote about who might fund a large redemption coming up if the Vigilantes are right: “The chances of a poor auction and an ever-increasing yield premium are correspondingly rising.”

Well, now we know.. The market has spoken. It likes Gilts.

The reality here in the UK is the Gilts market is giving Labour the benefit of the doubt. that rising confidence is backed by:

• The UK’s political stability on the back of the massive Labour super-majority is broadly acknowledged to enhance the UK’s political credibility and stability in a raging sea of populism across Europe and the US.
• The market is positive about Sir Keir Starmer and Chancellor Rachel Reeves taking tough, painful and difficult decisions – like cutting winter fuel subsidies to better-off pensioners, and focusing on the poor and needy.
• UK growth is recovering.
• The UK is increasingly seen as undervalued and a buy – witnessed by a recent analyst report from Goldman Sachs no less.
• The political instability in France, Germany and around the US election all focus the requirement for sound fiscal policy in times of high deficits – the UK’s political stability and competency makes it the standout pick.

There is no question the UK still faces enormous challenge in rebuilding and strengthening the resilience of the economy – that remains a massive job. But with the support of the Gilts Market and the degree of political competency the new Labour government is displaying… it at least looks possible.

My advice to right-leaning market practitioners, is cut the negativity, and get practical. This is an opportunity to fix the UK and to invest in it.

Out of time and back to the day job..

Bill Blain

Author of the Morning Porridge, founder of Wind Shift Capital

www.morningporridge.com

www.windshift.capital

billblain@morningporridge.com

Bill’s Pub to Club Swim