Blain’s Morning Porridge 15^th April 2026 – UK Gilts.. Nothing To Worry About

“Spend, Spend, Spend”

Damn the torpedoes! Full steam ahead. The recent 10-year Gilt auction was a screaming success. There is plenty of demand at the right yield – 5% for 10 years! The cost of servicing debt is high, but to create growth the government needs to fix the economy by borrowing more. Global investors know that when assessing the UK’s yield premium. The UK would do better to borrow more rather than less!

LINK TO PODCAST

Time for a morning without being angry worrying about Iran, Trump and other mistakes.

Instead, let’s celebrate Gilts! Yep, I’m a great fan of the UK’s government debt market because it’s the best organised, structured and managed bond market on the planet. That’s not just national pride – I have zero concerns today the UK is about to default. (If the Greens or Reform look likely to take office I reserve the right to panic – which is why I watch UK politics so closely. I oft despair.)

Surprised at such positivity from a bond guy? You should not be. Yesterday the UK’s Debt Management Office launched a new 10-year Gilt which saw a nearly $150 bln order book for a £15 bln sale! Wowser! Who said no one wanted to buy Gilts? Well… er, buyers bought because at 4.9% it’s a historically very attractive yield.

Now there are plenty of Gilt worriers out there. Mo-the-Tash (the marvellous Mohamed El-Erian) is worried about the premium on UK debt in an inflationary risk world, calling the UK’s finances “fragile” and vulnerable to mistakes. Sitting at the back of many investor’s minds is the Truster*uck, the moment of budgetary incompetence in 2022 that nearly triggered a Gilts meltdown – but which also showed how resilient the Bank and Treasury could be, acting swiftly to stabilise a crisis.

Since 1815 – the last major unpleasantness between France and Britain as they duked it out on a muddy field south of Brussels for the Global Hegemon Cup – UK interest rates have averaged 5%. They’ve been lower through long periods of stability and low inflation, but have soared in periods of higher volatility brought on by rising inflation, energy shocks and conflict. Clearly, we are in a new period of high vol, higher inflation risk, energy driven edge of crisis.

No Sh*t Sherlock – risks and interest rates are higher. That is not the end of the world. Its normal. Get used to it.

Despite my positivity on Gilts  this morning, I am concerned our current government here in Blighty does not understand bond markets – and that is a problem because bond markets are very, very, very important, and in bonds there is truth. UK Chancellor Rachel Reeves is absolutely determined to cling to her self-imposed rules and maintain financial headroom. She will not budge from financial rectitude – but to the bond market it comes across as a terror the markets might regard raising more debt as weakness.

Relax… Global bond investors care about one thing – being repaid principal and interest on a timely manner, which means they want to see competency in managing spending. Demonstrate a clear understanding of bonds and the economy, and they will be happy. But show the slightest hint of fear.. and the bond market will start to worry, and ultimately run away.

Reeve’s big mistake is to think that not spending is a good thing. It is not. Global investors think about liabilities, meaning they consider the whole structure of the UK economy and figure out what has to be spent. They look at Broken Britain and factor in not just the spending plan, but what the UK needs to spend into the equation. So they add the £17 bln the road industry reckons it will cost to repair potholes to our debt!

That creates a double whammy. For instance, if investors (rightly) figure the UK has to double its spending on Defence, then every penny not raised today is added to the perceived UK debt. The UK currently has a 98% debt GDP ratio, but global investors price UK debt at a higher multiple because they factor that no matter what Reeves thinks she is saving, it will need to be spent in the future when prices will be higher, and debt levels rising perhaps even faster. (I argued this 3 years ago to Labour ahead of the elections. I was told I did not understand the bond market.)

The bottom line is mature economies like the UK should not overly worry about spending constraints – investors assume you need to spend the money and are happy to lend it if they think you are competent enough to pay it back. That’s the key reason austerity is a complete waste of time.

There is good spending that has to be done, and bad spending (see my chapter on the Political Economy of Bat Tunnels from my new book, The Battle For Hamble on yesterday’s Porridge extra), which should be disciplined!

One fear is that raising government spending in a high-rate environment will hike bond yields. The success of yesterday’s Gilt auction shows that’s not the case – investors are delighted to buy bonds at the right yield.

High interest rates are not the end of the world. Some of us can remember double-digit interest-rates and paying 16% plus on our mortgages. We survived. The shock of higher rates now is largely due to the fact that the bulk of folk active in markets today can barely remember what the world was like before the Global Financial Crisis in 2008, and were in nursery on Black Wednesday in 1992 when George Soros (assisted by Scott Bessent, now US Treasury Sec) took down sterling and the Bank raised rates to 15%!

Interest rates of 5% are long-term elevated but still closer to normal than the ultra-low interest rates that so distorted markets and economic growth during the QE era (2010-2023). I would argue that ultra-low interest rates are more dangerous and distort investment psychologies far more than normal/high rates – low rates devalue the value of money!

The consensus across the Bond Markets is that very high outstanding debt quantums and high debt/GDP levels are a bad thing, high government debt servicing costs are unsustainable, and government issuance crowds out funding for rest of the economy – but show me the evidence (bet I get deluged in data on that). High government interest rates are the risk rate over which the rest of the economy is priced – thus the cost of borrowing for households and corporates rises.

That depresses consumption  and production. Maybe it’s a good thing because high interest rates instil a form of financial discipline that low rates do not and leads to a more resilient economy. High rates are an imperative to spend wisely, not speculatively.

One of the things we expect to see in a period of rising interest rates is a shake out of poorly founded debt. Since 2010 we’ve seen the emergence of a massive speculative financial sector; the meme stocks, the charlatan stocks that promise more tomorrow (like Tesla), crypto and its multiple bastard offshoots. We’ve seen speculative thinking seep into the mainstream as successive waves of hot-sector companies rise to massive P/E multiples on the expectation of massive future profits – even though the next new, new thing is just around the corner.

Low interest rates generate forth. High interest rates instil discipline.

The UK does suffer from significant debt frictions. The economy is poorly placed to withstand an inflationary oil shock, rising global prices will hit hard, and the Bank of England is expected to remain very cautious on rate cuts. Productivity is an issue. Brexit was a mistake. A deeper dive would raise worries about the shifting term structure of gilts – how the insurance and pension “real-money” accounts are no longer buying as much 30-yr long-dated debt and how the shortening maturity of outstanding debt raises an increased funding need each year.

One thing that is a crisis is an annual debt service cost of around £110 bln which is nearly double the nation’s spending on defence of $60 bln! That’s a number that’s got lots of folk angry – and I think I read about someone who has put a “rule” together than any nation where debt service exceeds defence is doomed. Or something like that.

But the UK compares well on Debt/GDP, at 98% it’s lower than every other major economy aside from Germany. Japan is on 230%, Italy on 135%, the USA on 122%, and France on 115%. UK growth sits in the middle of the range of similar nations. There are two sides to debt concerns.

To conclude for this morning:

In a period of good, old fashioned, higher interest rates, an acknowledgement the UK has to borrow money to fix Broken Britain (while cutting the out-of-control welfare budget and bloated NHS) would be a good thing. A massive programme of social housing construction alongside strategic manufacturing such as restoring UK shipbuilding, vehicles and aviation for commercial and military (dual use) would trigger growth.

Rachel Reeves just has to get her head around the fact that not borrowing is not improving the UK’s global credit score… To do that she needs to fix the country – which means a chat with the DMO about more debt…

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.