Blain’s Morning Porridge May 6^th, 2026 – Gilts and the Labour Party; the Judder Moment

“Apres Moi le deluge…”

The UK is not about to disappear in a puff of smoke because the Gilts Market is having a minor tantrum. But there is a serious Political Competency premium on Gilts, which will rise when the scale of Labour’s defeat becomes apparent, and the Starmer premiership is up against the wall. Trouble ahead.

LINK TO PODCAST

It’s two weeks since I last wrote about my growing concerns for the Gilt Market: “Gilts Wobble as Much as Starmer.”After the yield on the 30-year Gilt hit 5.81% y’day, perilously close to the key psychological 6% level, there is a definite sense of a Judder Moment. (This morning The Long Gilt it at 5.75%, 17 basis points higher than April 22^nd!)

The mood wasn’t help by bond guru Mo The Tash, (El-Erian) ex-of Pimco, yesterday tweeting his “concerns about the economic health of the nation” … A few weeks ago, El-Erian observed in the FT that Gilts have become “temperamental, overreacting to the slightest provocation.” That’s a great definition of a nervous market.

To be brutally honest, I don’t fret much about the 30-year bond. In a period of rising global inflationary expectations, the 30-year price should fall, and the yield curve will steepen as inflation will consume considerable future value of longer dated bonds. More limited access to longer dated debt does change the structure of the UK liabilities – being able to raise 30-year money is great for the UK’s Debt Management Office allowing it to lock in low-rates for longer (as they very successfully did during QE) and thus reduce the volume of gilts to be refinanced each year.

Panic not.

When a BBC reporter tells you the UK’s funding cost has suddenly risen to 5.8%, that’s a nonsense. The UK’s true bond funding cost reflects the rate of inflation (what the DMO pays on inflation linked bonds), and the rates of interest its paid-on debt raised over the average life of outstanding debt – which was largely raised at very low interest rates during QE and Covid. Relax.

There are some reasons to worry about the structure of the Gilts market. The UK has one of the most attractive repayment schedules among its peer group of about 13 years average Gilt maturity. In contrast the average length of US Treasury debt is just over 5 years – which is why the US Treasury faces a $10 trillion refinancing hurdle of its $38 trillion borrowings this year. They have more to fund to finance Trump’s insatiable demand for making rubble in foreign parts.

At some point real interest rates will stabilise and fall, opening up the long bond market again. What may be a future problem is a perception the demand for longer-dated debt is falling as the Pension and Insurance funds (the so-called Real Money accounts) that once used bonds to match future liabilities change their investment strategies and the quantum of long funding demand therefore falls. (I am going to ask some of my post-grad students to research the topic next year!) If long demand is falling it will have implications for the future structure, and therefore funding volatility, of all Sovereign Bond markets.

But, but and but again… The bottom line is the signal of a rising 30-year yield towards 6% is what matters – it’s spooked markets. Markets love a good fright.

I have long argued there are very simple rules around the “credit” quality of Sovereign Bond markets. These are defined in my Virtuous Sovereign Trinity theory: a stable currency, a sustainable bond markets, and political competency are all required for a nation to thrive. If any leg “wobbles”, then swift corrective action is required.

(Forget the notion the UK is about to default because Long Bond yields might rise to 6% and higher – as someone argued to me yesterday. Nations that hold the keys to the monetary printing presses (financial sovereignty) don’t go bust. But they will suffer consequences from printing money.)

However, the reality is that over the last two weeks the Gilts market has been among the worst performing among its “peers”. The 10-year UK yield has widened by 15 bp to 5.07%. In contrast the US has widened less by 10bp, Germany by 6 bp and France by 11 bp. That is hardly end of the world, but it should stop and make us think.

The reasons for the UK’s underperformance involve the vulnerability of the UK economy as an energy importer to the Iran War Oil Shock, the lingering effects of Brexit on Trade, and the stickiness of UK inflation (a combo of energy and Brexit frictions). It’s also due to the perception the Labour Government has foolishly allowed to develop that its scared of the Gilts Market. When Chancellor Rachel Reeves churtles on about “a lack of funding headroom” and the importance of “borrowing rules”, she has an uncanny ability to look like a Rabbit caught in the headlights at all times.

The bond market is a wild animal – it can smell fear… (Think Monty Python and the Holy Grail….)

Aw, Bless… but the real issue is Labour, under Sir Keir Starmer and Reeves, the party just doesn’t seem to understand the bond market. They are scared of it. Liz Truss was ignorant of its importance. She showed bluff and bluster don’t work, while her Chancellor Kwasi Kwarteng displayed an arrogance that roiled Gilts players. Rachel Reeves tries too hard to appease it. A better course would have been to appear confident, engaged, and aware of not only how to keep the market sweet, but to align with it. (I told her advisors that years ago. They told me I did not understand markets. Hey ho.)

Bond investors care about one thing only – the prompt payment of principal and interest. They fear uncertainty that may damage that. They want to see Governments creating economic conditions that make payment more likely. That means solving problems. Doing stuff. Looking scared does not impress them.

The last time we had a Gilts crisis it was on the back of the Trusserf*ck in Sept 2022 – the ill-advised budget of the shortest-lived Tory premiership. And it was solved very swiftly. When Truss’s unfunded spending plans and tax-cuts triggered an unforeseen liquidity event and margin calls on LDIs (Liability Driven Investments), it required immediate, coordinated, corrective action by the Bank of England and The Treasury to stabilise bonds. It required equally brutal action by the Conservative Party to restore the veneer of Political Competency by removing Truss and Kwarteng as quickly as possible.

Which leads us to the real problem the UK faces. There is clearly a significant political premium being imposed on UK bond yields. The political concerns around what tomorrow’s local elections will mean for the teetering premiership of Sir Keir Starmer are pretty obvious. He is going to get slaughtered at the polls – there is talk of Labour losing up to 1500 local seats – which matters little except for the signal of the Nation’s loss of confidence it sends.

And that will create a very different kind of political competency issue than the Lis Truss moment. It will not be solved quickly by The Bank and Treasury putting right a market issue, or the DMO being able to pull a couple of spectacular oversubscribed issues. It will be a market watching Starmer and Reeves acting like lawyers to remain in power, in denial (not just a river in Africa) and a market worrying about who will follow them into power.

There does seem to be a growing sense that Andy Burnham, the major of Madchester is the most “reasonable” candidate to keep the bond markets happy (er… what about the electorate?) The issue will be getting him a seat in the Commons and winning an election in what remains a leftist party.

I see trouble ahead..

Out of time and back to the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Please don’t forget about my new book, The Battle For Hamble. It’s a proper grown-up examination of how bureaucracy has failed: a tale of Greedy Corporates, Bad Planning and Economic Illiteracy. It explains how a wholly unnecessary Gravel Quarry will be dug in middle of a prosperous village – putting 6000 jobs at risk. The truth is no one wants gravel, and the quarry company understands it’s not what you dig out, but what you stuff back into a hole in the ground that matters. Gravel sells for £30 a tonne – Landfill earns £150 a tonne to bury. Go figure.