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A
At pjum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility helping our clients to navigate risk and achieve their long term goals. PUM our investments shape tomorrow. Today.
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B
Listeners, for one of our shows to wrap up a fun 2025 we want to answer your questions so email us unhedged.com what do you want us to answer on the show? I can promise you we will do our best. Pushkin if you are anywhere near the uk, you will know that this year's budget from the government, the release of its big picture tax and spending plans has been a whole lot of drama. So much drama. Leaks U turns to the leaks, accidental document releases, and now a resignation too. For something that aims to be nice and boring, it's been a whole scene. Through it all, you know who's been sitting in a Zen like state of calm? UK government bond traders. Those bonds, known as gilts, have held pretty steady despite some short lived wobbles throughout the whole thing. Today on the show we're asking what does that tell us? Has the government just done whatever the market wanted? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist and soon mince pie making machine at the FT in bright science sunny London. And I'm joined here in the studio by one of my esteemed colleagues who regrettably has not been in a Zen like state of calm, but instead has been bashing out stories like mad. It's Ian Smith. Ian it has been a kind of crazy week or so and it's been one of those weeks where you write a lot of stories and then you have to rewrite them because the market's just changed direction. Has it driven you insane yet?
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C
No, my zen like calm has been retained through the entire episode, I can assure you. It's been kind of chaotic and at the same time has landed. Okay, yes, the kind of paradox of this budget, isn't it? Yeah, it's actually landed quite well with investors, but in an entirely chaotic way.
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B
Like, like I say, this is supposed to be a nice boring process and chancellors, that's what we call our finance ministers in the uk, sort of like to almost sort of be below the radar and no one really know or care what they're up to. But this has just been like full on for weeks there were promises that were made or suggested and then there were backtracks to the promises on taxes they were going to raise. And then the Office for Budget Responsibility, which puts out a report after the budget saying this is what it all means, accidentally published it too soon right before the budget, just as I was.
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C
About to go and get my sandwich.
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B
Oh, what?
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C
So then I did the whole. All that reporting on an empty stomach, which probably didn't help, but no. Yeah, from start to finish it's been chaotic. Yes. I mean, we had a bit of a flavor of that in the U turn on the planned increase in income tax, which a few weeks ago sparked a bit of a sell off in the gilt market because investors had been expecting, based on government briefings, that there would be a rise in income tax to help balance the books. And then we reported that the government had decided to step back from that, which caused a bit of volatility in the market. And then, as you say, on the day, nearly an hour before we were supposed to get the OBR numbers, they were suddenly out there on the Internet and the guilt market moved and we all scrambled.
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B
There was a lot of scrambling. And the latest is that the chair of the obr, Richard Hughes, has just stepped down, hasn't he? He fell on his sword over this.
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C
Yes, he has. Not something that has caused really a big market reaction. It was largely what people thought would be the inevitable consequence. But now we're in a period of poring over what exactly happened with the early release of the numbers, questions about who's going to lead the OBR from here and what's the future for that as an important independent body that investors rely on to get a picture of the public finances. Plus there are questions following the budget, political questions around what was said in the run up. So that feeds into speculation around the position of the Chancellor and even the Prime Minister. So we've got political intrigue, drama, drama, a lot of drama. And at the same time, as I say, the budget itself sparked a bit of a rise in gilt prices on the day as investors were largely or kind of broadly happy with what went down.
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B
Yeah, on the day. And pretty much since I think I'm right in saying Sterling was up a little bit, UK government bonds have been pretty steady. All of us over here in Britland who worry about things like government bonds, we are mentally scarred by that experience from 2022 when Liz Truss and Quasi Kwateng, who was the Chancellor at the time. Liz Truss, of course, was prime minister for 40 something days blew up the bond market and it all went really horribly wrong. This could not be more different. Right, give me the headlines here. What was in the budget that gilt investors liked?
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C
Could I just set one piece of context, which is the UK has the highest borrowing costs in the G7. So running into this, we do have elevated borrowing costs. That does matter. Our debt interest payments are high and there's reasons for that. You know, we have stickier inflation and then some other places. But we also have worries, some say stem back to that 2022 episode around the kind of some call it a fiscal risk premium being charged to the government in terms of like extra borrowing costs that we have to pay because of the worries over the level of debt. So we've had some wobbles at the budget last year and then in January where you saw 10 year borrowing costs in the UK hit a 16 year high. That was the context running into this budget. But then we can get into the reasons why actually it landed okay. And I was kind of divide them up into a simple good reason and a nerdy good reason. And then there was like a more lasting nerdy bad reason would be my.
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B
Framing of that nerd three ways. As Rachel Reeves was saying in her budget speech, the government already spends. One in every ten pounds that it spends already goes on our debt servicing costs, not on repaying debt, but on just debt servicing costs. So we are pretty vulnerable to rises in borrowing costs. This is why, as you say, it's so important that the Chancellor can try not to spook the market. It's not easy not to spook the market, but that's why it's so important to us.
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C
And their hope would be that you create a self reinforcing cycle. If you can reassure investors, take out some of that risk premium I mentioned borrowing costs lower, then it relieves some pressure on the public finances, giving them more space that you can push things in a positive direction. And obviously the jury's out on whether we'll get there. And it's been closely watched by global investors who look at the UK as being one of those problem children in international bond markets, alongside France, for example, where there are real debt dynamics that people are worried about that are horrible. And so people are looking at the UK as an object lesson of can the bond market enforce some discipline over a kind of free spending government. So it was interesting in an international context as well.
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B
But let's get back to your three varieties of nerd going for the budget and what it is that the market liked about it. What's your first variety again?
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C
So the simple good reason it went well is that the government's what they call the headroom against our borrowing limits. The kind of money that we have extra left over after all the kind of tax and spending plans was about 10 billion at the spring statement and that has gone up to 22 billion. Nice in this budget. So they listened to the investor community and economists and broader commentators who are saying you need to increase this wiggle room because it's counterproductive. It's so small that any rise in your borrowing costs is eliminating it and creating all of this kind of panic. Discussions of are we heading for a 1970s style debt crisis?
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B
Which we're not.
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C
Which we are not. And so I paused more than you there. So yeah, they did that and that was a simple good thing they did on the day. A more nerdy good thing is that they also announce on the day how much debt they are going to be selling to investors. So in the current year, the 25, 26 financial year, that went up a little bit less than people were expecting. But also they cancelled some planned sales of long term debt and announced a new consultation on expanding this market in short term government debt. All of which is kind of meaning they're pushing more towards issuing more short term debt at a lower borrowing cost.
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B
That again is a global thing that we can kind of get onto in a minute. But like governments all over the place are realizing, game's up here, lads. We can't just keep issuing at the long end and borrowing on the never never.
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C
And the UK has done it especially. And so now we're moving more towards the us. So that's the kind of nerdy good to go to with the simple good. And I think that's the reason why you had gilt prices rising on the day, pushing down yields. And I suppose the lasting concern that people had would be around some of the consolidation, like the pain that the government was planning in the budget in terms of tax rises and spending cuts being very backloaded, kind of pushing that out close to the next election. And something that investors and we've written had warned about in the run up that this would question put a question on the credibility of the plans. But that's definitely a lasting concern that people have from the budget. I think on the day it was overrode by these other positives.
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B
Yeah. So some of the tax rises that are coming in are pretty hefty, I've got to say. But yeah, they are way out into, into the future and should come just before the next general election. And there is a reasonable question that you can ask which is, are they really going to do this running into a general election or not? But for now, markets are pretty steady. And I was writing about this the other day, I think it's easy to underestimate how hard that is to keep the bond market under control. So there was quite an interesting paper out the other day. It was a speech from the bis, the bank for International Settlements and their general manager put out a speech saying, look, essentially, and I'm putting words into his mouth, the bond market ain't what it used to be like. First of all, there's just tons of borrowing, like bond investors are being asked to absorb an awful lot of debt, like crisis era spending levels in peacetime, Right. In a non market crisis kind of environment and without recessions all over the place, they're still borrowing loads and loads of money. And at the same time some of the traditional long term buyers of that sort of paper have just disappeared. Right. So, so central banks have stepped back from the market. They're not doing quantitative easing anymore, which means they're not buying loads of bonds and lots of long term pension accounts of certain varieties have just stopped buying because these schemes are rolling off, because demographics are what they are. And so what has stepped into the breach, and this is particularly relevant actually to the long end of the UK government bond market. So really long term paper is that they are effectively like playgrounds for hedge funds which are kind of like shooting strategies at each other. And it's great that they're there, don't get me wrong, they're absorbing a lot of this long term paper, but at the same time, you know, they're not in it for the long haul. They're there to make money. That's kind of what, what they're there to do. And that means that you can get outbreaks of quite severe volatility in very long term bond markets that are really unhelpful to the general economy. So the fact, I think that Rachel Reeves has managed to step through this kind of field of rakes without smashing herself in the face, I think is something to congratulate her for personally.
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C
Yeah. And actually the bank of England talked about it again in its Financial Stability Report this week. The proportion of hedge funds in the gilt market, the kind of leverage strategies they're using, the so called gilt repo strategies and how much that's grown. Yeah, there's a lot of people think that's feeding Volatility in the market, such as we saw when people thought that Rachel Reeves was going to get fired earlier in the year and we had the flash sell off in guilt as people got worried. I think where the political risk comes in now is there are people looking ahead to the regional elections next year and questioning how strong this Labour leadership is. And I think where it fits into the broader international context and like parallels with France, for example, is there's this question among bond investors, which is given those supply and demand dynamics that you lay out, and they're very similar in different countries where pension funds are pulling back or life insurers are not needing the same kind of long dated assets to back long dated liabilities. Definitely something in Japan as well. Are people going to make decisions on the spending side that pulls back on some of that record issuance that we're seeing across the OECD group of rich nations? And really it's an open question, will any government do anything to really pull back on spending? And she's at least had a go at that and she's been rewarded for that. And there are investors saying some of that political risk has come out, but now they have to demonstrate they can go through with these plans, especially as the next election arrives. And I'm not a political commentator, but obviously there are people that are questioning whether they'll be able to do that. Then the question is what the alternative is going to be, you know, whether that be from the left or the right.
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B
Yeah.
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C
Is that new leadership that might come through in place of Reeves and Starmer really going to be as focused on committing to this fiscal adjustment that investors want?
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B
Well, so that sort of keys into a slightly broader point, which is there is a school of thought that says, why is the government like bending the knee to the bond market? You know, if we want to borrow more because we don't want to jack up taxes and we don't want to cut spending, why don't we just tell the bond market to take a running jump and just cram it down and accept our debt? My view, and I think you're going to agree with me, is, look, this is like shouting at the weather. It's just, it's not going to work unless you put a gun to people's heads. You can't force them to buy your bonds. You have to be offering them something they want to buy, which is safe debt with low inflation that doesn't chew them up. And with decent debt dynamics that just suggest that there's a sort of. There is a plan here. Right. I mean, to your mind, is it possible to tell the bond market to take a running jump?
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C
No. And as we saw with the reaction to Andy Burnham's comments the other week where he said, we don't want to be in hoc to the bond market.
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B
Yeah. So he's the mayor of Greater Manchester. He's been eyed as like a potential successor to Keir Starmer, the Prime Minister. And he was saying, yeah, who the hell's the bond market? Effectively?
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C
And you can understand why people say there's a democratic deficit here. These investors, many of whom do not live in this country, shouldn't be deciding what decisions we take. The problem is the bond market does set your cost of borrowing. So if you paid no heed to what bond investors think, and they have done in periods of history, just stop buying your debt, forcing up your borrowing costs, and then you have to change course. And we've seen governments or leaders show themselves the door or change their plans, such as we saw with Liz Truss and Kwasi Kwa Tang. As you say, you're forced to step back.
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B
Well, you're forced to step back pretty much, unless you are the United States of America. It's funny, isn't it? They can just get away with so much more jiggery pokery with the central bank and with borrowing and tax and spending. Because it's the states you operate the world's dominant reserve currency. People are gonna buy your bonds kind of anyway. I mean, wouldn't it be great? Like, is there a way we can engineer it so that we're the world's dominant reserve currency Again, let's just make.
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C
Sterling the reserve currency of the world. Start right here.
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B
Just declare it on the Unhedged podcast.
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C
You do carry a lot of gravitas. Let's see if that can. We can make that happen.
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B
I cannot.
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C
But like you say, no. They have that huge advantage in the US and it's not like people aren't concerned about debt sustainability in the US. Earlier in the year, we had the one big beautiful bill act, obviously going to widen the deficit, but they have this huge advantage that people are forced to buy US Treasuries as a reserve asset. So central bank reserve managers, the people that look after the rainy day funds at central banks, I mean, they're not forced.
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B
Forced, but like, in reality, they've got so much money to invest and other bond markets are just so, oh, small, tiny bond markets, they just can't compete. They're just not big enough.
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C
They're not forced, but they have an obligation to hold assets, they can sell quickly and they have responsibility, you know, to their countries. So the US has those advantages. It's hard for the UK to kind of compete there. So they do have to pay heed. But also our borrowing costs just are high, you know, and partly that's due to sticky inflation, meaning the bank of England hasn't been able to cut as much as other central banks to the European Central Bank. So part of it is that our short term rates are higher and what we might see, and the hope would be that you get more of a fall in inflation, that allows the bank of England to cut interest rates more and that pulls down borrowing costs like short term, medium and long term. It pulls it all down and it helps along with the things we're discussing earlier on the fiscal side. So you get that kind of combined effect.
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B
So just to kind of, you know, put a little bow on this whole discussion, I was doing another podcast the other day for the FT and they were saying who was the big winner out of the budget. And I said, the bond market. Like they basically got what they wanted here.
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C
Yeah, they are the constituency that has been listened to. You know, you can understand the treasury did not want a rerun of last year where it was seen that certain policies which helped to kind of feed inflation or the rise in borrowing that came through that budget was not expected to the same degree by the market. And that was, you know, taken worse, you know, not Liz Truss levels. But it did create a bit of anxiety in the market. Whereas this year they focus much more on landing it. But that doesn't mean it's good for everyone else. You know, things that bond markets care about, inflation being lower, growth being lower can actually help because we'll get more interest rate cuts that might benefit gilts. These aren't the things that the rest of us. Well, inflation is, but on growth, it's not the things that the rest of us want to see. Right. So I think there is still that growth thing that we haven't talked about, and that is something that investors do want to see too. But they were so focused on that kind of fiscal adjustment and that has been delivered.
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B
Just one final point is, I think an underappreciated element to the stability that we've seen in gilts over the past week or so is that the US Government bond market is also quite nice and quiet at the moment. I think had we been in a situation where US government bonds have been like falling in price for whatever reason, when Rachel Reeves came to present her budget. The market reaction could have been very different because the US market really pulls everyone else around. So I'm afraid we are not out of the woods yet. But Ian, we have lived to see another day after a frantic sort of week or 10 days or so. So go us. We are going to be back. Listeners with Longsh. Foreign.
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A
We actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most, from geopolitics to inflation to liquidity, PJUM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility helping our clients to navigate risk and achieve their long term goals. Pgum our investments shape tomorrow today.
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B
Okie dokie. It is time for long short. That part of the show where we go long a thing we love or short a thing we hate. Ian, you've got a very concerned look on your face. Have you forgotten to get a long or a short?
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C
I was pondering my butterfly long from many months ago, which actually I think I might take some profits on. Yeah, because butterfly numbers have come up, I read. You know, it hasn't been a bad year for butterflies so I bought low and I think I might run profits on that one. Okay, so I was just pondering that investment decision as you were looking at me.
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B
So you're going short butterflies?
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C
I, I think I've run so, you know, take some money out, maybe invest.
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B
Somewhere else but keep the position, take profits on butterflies. It's been a long week for Ian Smith listeners, that's all I can tell you.
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C
And okay, and then the money, maybe I, you know, I might initiate a new tactical buy on the little aspherical chocolates that we eat a lot of in our household at Christmas. In the run up to Christmas. Yes, I know this will go up and down, but I think a cold winter and based on my own personal consumption that has already begun. Long chocolates and the Katie Martin mince pies have not yet appeared in the news.
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B
I was going to make them last night and then I ran out of time but I've got the pastry kind of ready, so they are imminent.
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C
And you're going to send one to every single unhedged listener? That's what I heard.
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B
I wouldn't go that far but you know, if anyone comes to visit me, they will get a mince pie.
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C
Oh, there you go.
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B
I am. Well, am I long cats or am I short men? I don't know, I'm allergic to cats so I can't really deal with them, but I was amused by a story that I just saw in the New York Times saying there's been a study published in the journal Ethology in which research has found that cats have to meow more loudly when they want things from men than when they want things from women.
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C
This is not true. Based on Noah, my cat. He meows loudly at everyone.
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B
Regardless listeners, that's enough animals for now. We are going to be back in your ears on Thursday. A special episode with a proper brain box. Not that Ian is not a brainbox. Ian, thank you so much. I know you're really busy and it's very kind of you to come along today. Listeners, listen up again on Thursday. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our Executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening. Sam.