Blain’s Morning Porridge – December 1^st, 2025: Gilts indicate Stability – what is generating the noise?

“There are lies, damned lies, statistics, and the Torygraph – where even Lucifer fears to tread.”

There is a lot of noise in Gilts these days. The danger is it derails national confidence – even though much of the clamour is twaddle. The reality is all Governments face challenges, but the UK’s Gilts market is much stronger and more resilient that the right-wing press would care to admit.

LINK TO PODCAST

The most famous quote about bond markets is “I want to come back as the bond markets. You can intimidate everybody.” Its ascribed to James Carville, Bill Clinton’s lead political strategist. Back in its heyday it recognised the supposed threat Bond Vigilantes hold over bonds – picturing them as a band of furies ready to leap upon governments or financial authorities on any sign of foolishness, backsliding or bad policy.

Given all the noise about the UK government budget there are many who think a UK Bond crisis is imminent. Relax – ignore the noise, understand where it is coming from (and why), and be analytical about it.

Let’s start by asking how the market reacted to the budget? No stress. No Drama. Yields tightened. Markets accepted it for what it was – best of a bad job. Yet, the weekend was full of yet more drama, and the predicable hypocrisy of failed politicians demanding heads for doing what they would have done.

Last week I was challenged to explain why I think the UK’s bond markets – GILTS – are much, much more resilient than the market commentariat is currently painting. I’ve listed some things below, and a list of four things the government might do to restore some credibility. If you aren’t a member of the Morning Porridge, you will need to go the website, read the whole article and maybe subscribe to read them! (£10 per month – best money you will ever spend in markets!)

Let me start by saying Bond Vigilantes only exist in our fears and imagination. There is no unified connected hive-mind controlling the bond market, just pragmatic investment logic. The concept of market discipline and punishment is invented – a bit like the ancient Greek Furies – to explain the wild traumatic swings that can and do occur in Government Bond and Credit Markets when something snaps, and traders wake up to the consequences.

What is true is the bond market is a very clever place staffed by very smart folk. Unlike stock traders who are regularly swayed by convincing narratives (like the fairy tales that wash around AI), the bond market is about cold, rational reason. There are times when perceived problems result in what looks like coordinated sharp moves – but sudden shifts in bond markets are the result of common sense.

Bond market investors care about 2 things:

1) will they be repaid interest and principal, and

2) what is the inflation risk.

They make considered judgements on credit and the economic outlook, and they seek to anticipate the consequences of how politics, economic data, geopolitics, market and commercial activities will change these. They factor all these inputs calmly and rationally.

But this is a dangerous time: The divide between calm bond markets, and the utter financial mayhem “commentators” confidently expect looks like Witchcraft to many. The deluge of negative and incorrect news is shaking confidence in the economy. Most of the utter twaddle currently in the commentariat demonstrates zero understanding of money, bond mechanics and market practice.

It embraces utter nonsense and idle speculation dressed up as irrefutable fact. It thrives on Twitter, Linked-in, Substack and the right-wing press. That “media” loves sensationalism – and what could be better than political instability and economic incompetence to drive up viewing numbers, and push Labour out of power!

Few people understand how bonds work. (There were only three: there was a chap in an American university but he’s dead now, a German analyst who is confined in a lunatic asylum, and myself, and I’ve quite forgotten…)

I’ve built my own framework to explain government bond markets – the “Virtuous Sovereign Trinity” of the key factors of a stable currency, a sustainable bond market, and political competency work together. You can add variables – from how central banks addressing inflation can roil the currency, make bonds sell off, or how bad policies impact employment…  make it as simple or complex as you like. Add in some common sense – like how “dull, boring and predictable” what bond markets like is.

And, yes, there are problems like high debt loads, and unsustainable spending vs revenues. Equally there are solutions – including many the markets would prefer we don’t talk about like managing inflation. But generally, bonds work well to fund governments and companies.

Bond markets act swiftly to punish financial foolishness – the Liz Truss/Kwasi Kwarteng budget of October 2022 resulted in the Gilts market staging a dramatic sell off. On its own, a tax-cutting and spend more strategy to drive growth was marvellous – but it was an eat more chocolate to get thin illusion. Unfunded it was just daft and raised all kinds of concerns. But it was the consequences that were unforeseen – the sudden rise in Gilt Yields triggered margin calls on leveraged (LDI) positions which could have sunk the market (a domino effect of crashing institutions brought down by sudden cash calls), but swift action between the UK Treasury and The Bank averted crisis.

Politically, last week’s budget was a cop-out by the timorous Labour government – they raised taxes to buy-off unruly Labour backbenchers with a bribe in the form of increased welfare spending. As policy goes the budget won’t turbo-charge growth, improve the national finances, rebuild infrastructure. It was all a bit “pretend and extend”.

But…. The Bond market liked it. There were no dramatic price falls, or a sudden spike in rates. Yields have fallen. There is not a single credible global institutional investor who thinks the UK government triggered Götterdämmerung.

That’s because Gilts buyers look at facts – not speculation.

• The market did not sell off on budget. It was stable and yields fell.
• The market likes the Chancellor sticking to rules and the increased fiscal headroom.
• The market is confident in the Treasury, Debt Management Office and The Bank of England will swiftly address any sudden events or weakness.
• Sterling barely moved – showing global markets are unconcerned.
• Gilt issuance this year (25/26) will likely be the second highest on record at £304 billion, but strong demand means at least 5 fundings in the coming quarter are no longer necessary.
• Demand for gilts has been strong, including record oversubscription for 10 and 15 -year syndicated bonds in Q3 and 4.
• The new post-auction option facility has been welcomed and used by the market to increase take-up of supply.
• Every single Government bond auction since July has had a cover ratio over three-times – a market of success – 3 bonds wanted for every one sold!
• There has been a shift towards shorter-maturities – reflecting investor demand, and because the UK’s Debt Management Office has the longest average maturity of outstanding debt among developed economies.
• There are consultations underway next year on a new G-Bill market for Government Bills.

These are facts… but why is the mood still so negative?

Perhaps the government has to wake up and start taking decisions. Here’s a little list to things for Chancellor Reeves and Premier Starmer to consider…. All of which could be funded by being brave about welfare cuts and explaining to the market:

They both know the UK needs a massive rebuild and that can only be done with growth. However, money needs spent now. That means prioritise. There are aspects of the economy where planned spending could generate massive multiplier effects, and opportunities to innovate good policy.

1. Be brave. Confront backbenchers. Explain the fundamentals. Do Stuff. Get hard.
2. Rebuild the NHS completely from ground up. It’s no longer fit for purpose. Funding needs addresses before it consumes the nation. But a rebuild of the NHS and using its data could trigger massive multipliers in terms of bespoke AI, new systems, drive UK med-tech and pharma.
3. Housing – we don’t need 1.5mm new executive homes on greenbelt for workers who can’t afford them – we need 2 mm social housing and affordable apartments for young workers to build careers, start family formation and grow the economy. Build flats in cities, and tell owners of unoccupied flats they will be “managed” by govt – if left unoccupied, owners will be paid a market rent on them. Housing – massive multiplier effects!
4. Defence – spend now. Massive multiplier effects across the economy. Offer any vetted “immigrant” fast track to citizenship from 5 year’s service. Introduce a competitive Scandy-based conscription scheme which gives conscripts a fast track to better jobs!

Ok – it’s not my job to tell government what to do… but if Labour wants to succeed… And if they are too busy fearing their own backbenchers, then I’m pretty sure it’s policies like these that Reform will be looking to embrace…

Meanwhile..

Christmas started a day early in Blain World this year. A gang of us took a trip on the Watercress Line Railway pulled by a beautiful Christmas themed illuminated Steam Train illuminated for Christmas. (Since you ask, it was 35005, “Canadian Pacific”, a beautiful Merchant Navy 6-4-2, one of a class of 30 trains named after the shipping lines that helped win the Battle of the Atlantic. It was the kind of engine that would have pulled my daily train from Southampton to London back in the 1940s and 50s.)

We have three weeks till the holiday.. let’s try to enjoy them!

Out of time, and back to the day job…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital

Special Advisor – Spitfire Strategic Capital