A new Prime Minister, a surprise Chancellor and gilt yields above five per cent. What markets actually did this week, and what they are waiting for.
I once sold a holding on the morning of a political announcement, feeling terribly decisive about it, and bought it back eleven days later at a higher price, having learned precisely nothing except that I am not as clever as a headline makes me feel.
Markets react to politics in two distinct stages, and almost all the money is lost in the first one. Stage one is the reaction to who. Stage two is the reaction to how much, and how it will be paid for. Stage one happens in hours and is mostly noise. Stage two happens over months and is the part that actually matters.
We are firmly in stage one.
What happened this week
Andy Burnham became Prime Minister on Monday, the country’s seventh in little over a decade, and named John Healey as Chancellor of the Exchequer late that evening.
The market response was quick and legible. Gilt yields rose after the new Prime Minister said he would keep to the existing fiscal rules while using the flexibility within them, sending the benchmark ten-year yield up around eight basis points on the day to just above five per cent. The thirty-year yield reached its highest level in two months, near 5.75 per cent. Sterling dipped against the dollar, then steadied once the Chancellor was announced.
A yield rising means a bond price falling, which means investors are demanding a little more to lend to the government. That is all it means. It is not a moral verdict; it is a price.
By Tuesday morning, yields had eased back across the curve, which analysts read as markets being reassured by the cabinet choices rather than by any policy. Defence shares rose on the reasonable inference that a former Defence Secretary at the Treasury implies more defence spending, and one strategist noted the new Chancellor had previously argued for lifting defence spending to three per cent of national output.
Underneath all of it, the economic data was quietly doing its own thing. Unemployment held at 4.9 per cent for a second month. Private sector wage growth slipped to a five-year low. Vacancies relative to unemployment stayed below the level generally treated as equilibrium.
What the market is actually pricing
This is where I want to be careful, because it is easy to dress political opinion up as market analysis and I am not going to do that.
Bond investors do not price ideology. They price two things: how much a government intends to borrow; and how credible its plan for repaying it looks. A government of any stripe that borrows more than expected pays more. A government of any stripe with a plan the market believes pays less. That is the entire mechanism.
What moved this week was uncertainty, not disagreement. The commitments announced so far, including a stated intention to look at raising tax-free income thresholds and to tackle social care, all carry costs that have not yet been set against numbers. Until the October budget puts figures beside the intentions, investors are working with a shape rather than a sum. Uncertainty has a price, and this week you could see it.
The other thing worth naming plainly: gilt yields have been elevated for years now, through more than one government, on concerns about sluggish growth and a rising debt burden. Borrowing costs spiked to a post-2008 high back in May. This week’s moves sit on top of a long-standing high rate condition rather than creating a new one.
What it means for an ordinary portfolio
Three practical observations, none of which require a view on anybody’s politics.
Higher gilt yields mean lower prices for bonds you already hold, and better income for bonds you buy from here. If you hold a bond fund inside a pension or an ISA, you have felt the first half of that for some time. The second half is the compensation, and it only arrives if you stay.
The pound is moving against the dollar, and the euro changes the sterling value of your overseas holdings without material changes to the underlying companies. That is the currency layer that sits quietly inside every global fund, and it is why I keep arguing that currency belongs in your thinking whether or not you ever trade it, much as I did in three central banks, one lesson for your money.
And rate expectations have shifted, with the swaps market implying tightening over the coming year despite an economy operating below its potential. That is a tension, and tensions in rate expectations usually resolve untidily. If you have a mortgage coming up for renewal, this is worth watching rather than assuming.
The discipline I would keep
Do nothing in the first week. Read carefully in the first month. Decide after the budget.
That is not passivity; it is sequencing. The information will determine what any of this means for your money does not exist yet. It arrives in October with numbers attached, and by then most of the noise will have cleared. Reuters, the Financial Times and the Office for Budget Responsibility’s own publications will tell you more on the day than a fortnight of commentary will now.
I have paid, more than once, for the privilege of learning that trading a headline is just paying a fee to feel involved. The market will still be there in October. So will your plan, if you let it be.
The Jacqueline Brand — knowledge builds confidence, confidence builds wealth. This is editorial commentary for inspiration, not financial or professional advice. Always do your own research. The Collection
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