Blain’s Morning Porridge Jan 22nd 2025: UK Gilt Blowout, but Ray Dalio says Death Spiral!
“Debt-Bomb, Debt-Bomb, you’re a Debt-Bomb…and baby, you can turn me on..”
Yesterday’s UK’s 15-year Gilt deal was a 15 times oversubscribed blowout success, demonstrating global investors have confidence in the UK’s competence, stability and markets. However, Ray Dalio is writing another book about why countries go bust, and reckons the UK is caught in a debt-death spiral. I doubt it.
The week before last a young writer for a well-read journal of the Right was telling me the UK Government Bond market, Gilts, was on the verge of collapse. I thought he was interviewing me, so disagreed and tried to explain the actuality. He stopped me. With patronising patience he explained how the bond vigilantes were out in force against Gilts, having lost confidence in the Government, and Rachel Reeves in particular, and that UK govt bonds were essentially unsellable to a global investor audience because the multiple and manifest failures of the new Labour Government. He claimed Chancellor Reeves was even more destructive to Government finances than Liz Truss – who is a misunderstood genius. (!)
After a 40-year career in fixed income markets, there is nothing likely to impress me more than a snotty blue-nosed Journalist a few winters out of hack-school telling me how bond markets really work. I thank him for the lesson. I did try to explain he was talking bollchocks… but there are none so deaf as those who shout in the certain knowledge some bullsh*t they’ve read on Twitter/X is irrefutable fact. I asked him outright why he was writing stuff designed to break confidence in Gilts? He muttered something about how terrible the Labour Government was. He was determined to expose the imminent catastrophe he foresaw in the UK’s financial position.
Fair enough. It is a journalist’s job to expose risks and question them. When they cross the line into advancing political agendas – as every single writer on the Torygraph now does – we have the choice to stop reading. 10 days later and the Gilts and Global Bond panic is dimly remembered. Gilt yields are down 30 basis points – to 4.60% in 10 yrs – a fall in line with global bonds. He was wrong.
Yesterday the UK’s Debt Management Office – which runs the Gilts Market – scored a stunning success with its first syndicated deal of 2025. It was a £8.5 bln reopening of the UKT 4.375% Gilt due 2040. They secured an order book of £120 bln – another record oversubscription. Nearly 300 accounts participated with orders for the deal. International buyers demonstrated there is no buyers strike on UK Gilts: more than 30% of the deal was placed outside the UK. Terms of the deal were frankly superb – priced at tight-end of the spread to reference gilts.
Despite all the noise and negative blurb this year, the success of the deal and quality of the order book confirmed the major global bond buyers still perceive UK gilts as a buy. They buy Gilts because – despite hiccups like Brexit and Liz Truss – the UK is still perceived as a politically stable nation, the Gilts markets is managed by an extremely competent Debt Management Office, and sterling is still a major hard currency. Gilts stands out as a bond market. Unlike Europe, where there are significant concerns about market liquidity, that is not perceived as a major concern by Gilts players.
These factors show the UK retains its Virtuous Sovereign Trinity of a stable currency, a sustainable bond market, and while the Right Wing Press and Elon Musk would have us believe otherwise, the market gave Rachel Reeves and the UK government credit for political competency and making tough calls on spending. £120 bln of orders for the bond highlights global confidence in the UK.
I accept one successful bond syndication does not a glorious summer make, but it does highlight just how much absolute twaddle, fear, and panic was being communicated across Twitter/X and the Right-Wing Press about Gilts since the opening of the year. Fortunately, bond buyers are less susceptible to hype and bluster than stock pickers. But the market has to remain very aware we live in a time of deliberate miscommunication and disinformation.. Sadly, we live in times where political hacks are more than willing to sacrifice the economy to advance their owner’s agendas and make their political targets look bad.
All the above does not absolve the Labour Government making critical mistakes in its first 6 months in power – communication and engagement has been appalling. Policies have been poorly presented. They have talked down the economy, rather than talked it up. I fear they are now running scared of being seen to make further mistakes – which sadly means they will make more. (I will be writing about this later this week as Reeves has found another banana skin to slip on..)
Whatever the Torygraph and Kemi Badenough say, Labour do have a massive 10-year burden of political economic neglect to repair. We need to be honest: the UK went wrong in 2015 when Brexit turned the competent Cameron/Osborne era into a rolling clown show of vaulting political ambition. Too many people are pretending it just didn’t happen. It did. But enough politics….
The fact remains: global markets are in a bond bear phase. There are significant inflationary pressures which could reignite on geopolitical and trade issues. It feels like US President Donald Trump is waving a naked flame in a powder store with his threats of tariffs and national preferment – they may work and achieve a better-balanced global trading base, but they could conflagrate into a bonfire of recession/stagflation.
There are also clear concerns about Trump’s plan for a scaled-up variation of the tried and tested tax less and borrow more Liz Truss approach to stable bond markets. Trump is betting that if he looks strong, says MAGA a lot, and is talking up US prospects, then the bond vigilantes won’t spot the inconsistencies that made Truss’s plan such a dodo. I do think there is a good chance it will work for Trump, buoyed by the clear resilience of the US economy, strong stock markets, and the pivotal importance of the US dollar. However, doubts will remain about the burgeoning scale of the US budget deficit and for how long the global markets will fund the USA in a dollarized global economy. If the US bond market sneezes, Gilts and European bonds will suffer serious contagion.
How can we improve Gilts further?
I read one market comment suggesting the UK could seek to diversify funding away from GBP by borrowing in Euros, Dollars and Yen to diversify its funding base. To remove the Argentina Risk – of going bankrupt by borrowing in someone else’s currency – they would hedge the currency risk in the Swap market. It’s an idea, but to be used selectively.
A better one would be to stop QT and instruct the Bank of England to hold-to-maturity the £650 bln of gilts bought during QE currently on its books. That means freeing up the market from the supply created by the sale of some £100bln of QT sales per annum. I don’t understand why this hasn’t already been done? Even better than that would be to simply make the BoE’s gilt holding vanish – Zonk Theory (do a search on the morning porridge website for a full explanation of how to improve gilts through liability management.)
The UK is not out the woods yet. This morning the FT carries “Bridgewater founder Ray Dalio warns of UK “debt death spiral.” The comments section on the article confirms it has delighted all these who believe Labour is entirely to blame for the UK’s apparently precarious financial stability. After all, Ray Dalio is an acknowledged Bond Expert. Who am I to disagree with him. I’ve been a bond market drudge, a mere mechanical upon the bond stage syndicating, originating, broking, and occasionally commenting on bonds these past 4 decades.. what would I know?
Dalio’s base case is that if the UK has to borrow money simply to service it rising interest costs, then it will tumble into a “death spiral” – which he defines as debt service costs squeezing out spending and requiring higher taxes. I’ve watched such tornadoes of financial stress threaten to sink nations before – during the European crisis from 2010-2012 there were repeated comments about Italy, Greece, Spain, even Ireland, being in inescapable “death spirals.” They remain with us today – their problems patched and solved by competent central banker and liberal doses of QE (which generate subsequent consequences we still need to address.)
The UK does face crisis, but its actually better placed than most other Western economies – the average maturity of UK debt at 15 years is longer (and most of it is still paying very low rates from the QE era), and our deficit at 4.5% is less than other nations – the USA is at 6%!
Out of time, and back to the day job…
Bill Blain
Author of the Morning Porridge
