How Labour appeased the bond vigilantes

It’s the narrative that just won’t die: the UK bond vigilantes have backed off because of George Osborne’s courageous emergency budget.

You can read it here from Benedict Brogan in The Telegraph, quoting Matthew Hancock (left), MP for West Suffolk and Osborne’s former chief of staff.

“His argument is that the cost of two and three year money has roughly halved, and that’s because the Coalition has mapped out a clear and speedy deficit reduction plan. On March 24, the date of Alistair Darling’s last Budget, two- and three-year rates were 1.205pc and 1.855pc respectively; on election day they were at 1.076 and 1.687; on June 22, George Osborne’s first Budget, 0.784 and 1.292; yesterday they were at 0.68 and 0.96. Ten year borrowing is down from 3.96 to 2.91.”

All very plausible. Until you look at the recent history of the 10-year bond yield:

What this chart shows is that the 10-year bond yield peaked at around 4.2 per cent before Alistair Darling’s 24 March budget and has been falling ever since. Using Hancock’s logic, one could just as easily argue that it was Labour’s budget which calmed down the markets.

So did the markets forecast a Conservative victory in the general election and price that in? It seems rather a stretch to credit bond traders with that level of foresight, especially given the fact that we got a hung parliament.

The far more likely explanation for the fall in bond yields is that investors have been ploughing money into gilts this year because they have been  spooked about eurozone debt and the meagre outlook for growth in many Western economies. Osborne’s voluntary austerity has little, if anything,  to do with it.

UPDATE Duncan Weldon at Left Foot Forward criticises the Hancock argument too, pointing out that US bond yields have fallen despite the White House suggesting a further stimulus.

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