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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• http://www.facebook.com/people/Andy-White/1613220003 Andy White

  No that is not what the chart shows. It shows two distinct periods. One where the yield varies around 4%, and one where the yield trends strongly downwards. You can clearly see the point where the market moves from one state to the other. It flexes at the end on April as markets make short term bets on the election, you can see a very well defined tick back up between the 7th and the 12th of May as there is a worry that the Labour may stay in power. After that that there is an extremely well defined downward trend.

  Secondly, it is incorrect to say that this is caused by fears over the Euro. The French and Germans are not likely to run into difficulties and if investors wanted Euro assets they could run there rather than Britain, which has after all had a weakening currency. Or to America where continued stimulus should be increasing growth prospects if the editorial line of the independent is correct.

  No matter how hard you try, the evidence clearly points to the Coalition having a positive effect on on interest rates; the single largest stimulus that the country has available.

• Jake_K

  Exactly so Mr White. But once the narrative has been written, facts don’t matter to many people. See Fox News for an example from our American cousins.
  The only hope for the Labour party is the failure of Coalition education policy and more of the same simplicity from our education system.

• http://www.facebook.com/profile.php?id=507183355 Patrick O’Loan

  Hard to believe you’d use that chart to illustrate that argument.

  Evil bond vigilantes lurking in the shadows ready to pounce are a politically convenient myth more suited to a Bond film than bond markets.