Unhedged Podcast: "Bonds vs Budgets"

Date: December 2, 2025
Hosts: Katie Martin (Markets Columnist, FT) & Ian Smith (FT Reporter)

Episode Overview

This episode dives into the dramatic release of the UK government's 2025 budget, examining its surprising calm impact on the UK government bond market (gilts) amid significant political turmoil, leaks, and high investor anxiety. Katie Martin and Ian Smith break down why markets responded so serenely compared to the notorious 2022 mini-budget disaster, what this means for fiscal credibility, and where risks might lurk beneath the surface for UK bonds and budgets.

Key Discussion Points and Insights

1. UK Budget Drama vs. Bond Market Calm (00:30 – 04:47)

• The budget announcement was chaotic: leaks, U-turns, and even the accidental early release of an Office for Budget Responsibility (OBR) report.
  • Memorable Moment: "For something that aims to be nice and boring, it's been a whole scene." – Katie Martin (00:36)
• Richard Hughes, OBR chair, resigned after the premature report release, but the market barely reacted.
• Gilts (UK government bonds) remained remarkably steady through the drama, with only short-lived volatility spikes.

2. Why Were Gilts So Calm? (04:47 – 09:38)

Recent History and Investor Sentiment

• Memories of the 2022 Liz Truss and Kwasi Kwarteng mini-budget disaster loom large. That event spooked investors and sent UK borrowing costs sky-high.
  • "All of us...are mentally scarred by that experience from 2022 when Liz Truss...blew up the bond market and it all went really horribly wrong." – Katie Martin (04:55)
• Current UK borrowing costs are the highest in the G7; persistent inflation and fiscal "risk premium" are still present.

Three "Nerd" Reasons for the Positive Market Reaction

• Simple Good Reason: Increased 'headroom'—the buffer between spending and borrowing limits—rose from £10bn to £22bn, reassuring investors of fiscal space.
  • "They listened to the investor community and economists...saying you need to increase this wiggle room." – Ian Smith (07:31)
• Nerdy Good Reason: The government slightly increased annual gilt issuance less than expected and shifted strategy towards more short-term debt, reducing reliance on volatile long-term funding.
  • "They cancelled some planned sales of long-term debt and announced a new consultation on expanding this market in short-term government debt." – Ian Smith (08:22)
• Nerdy Bad Reason: Fiscal tightening is "backloaded"—spending cuts and tax rises are scheduled after the next election, raising doubts about their credibility.
  • "That would put a question on the credibility of the plans." – Ian Smith (09:15)

3. Structural Changes in the Bond Market (09:38 – 13:24)

• The Bank for International Settlements highlighted shifts: traditional buyers (pension funds, central banks) have withdrawn, replaced by agile hedge funds trading for profit, escalating long-term bond volatility.
  • "They're (hedge funds) there to make money...you can get outbreaks of quite severe volatility in very long-term bond markets..." – Katie Martin (11:32)
• Bank of England's Financial Stability Report noted leveraged strategies (gilt repo) by hedge funds, contributing to recent flash sell-offs.

4. Political Risk and the International Context (11:50 – 13:34)

• Bond market discipline is shaping global fiscal policy decisions. Investors are watching the UK alongside France as "problem children" with worrying debt dynamics.
• Upcoming elections inject uncertainty about whether fiscal tightening can be followed through: "Now they have to demonstrate they can go through with these plans, especially as the next election arrives." – Ian Smith (13:14)

5. Can You Defy the Bond Market? (13:34 – 17:13)

• Some (like Andy Burnham) argue that governments shouldn’t "bend the knee" to the bond market. The hosts push back, explaining the reality of global capital markets:
  • "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." – Katie Martin (13:51)
  • If investors won't buy, borrowing costs soar, and policy U-turns become inevitable—as in 2022.

US Privilege

• The US, as the issuer of the world's reserve currency, is an exception: the Treasury market is massive and liquid, so global investors "kind of" have to buy.
  • "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?" – Katie Martin (15:33)
• The UK has no such luxury and suffers more directly if it loses market confidence.

6. Interest Rates, Inflation, and the Path Forward (16:25 – 18:18)

• The UK's sticky inflation keeps short-term interest rates—and thus borrowing costs—high versus Europe.
• The hope: falling inflation lets the Bank of England cut rates, easing pressure on budgets and debt servicing.

7. Who 'Won' the Budget? (17:13 – 18:18)

• The real winner? The bond market.
  • "I said, the bond market. Like they basically got what they wanted here." – Katie Martin (17:18)
• Fiscal consolidation pleases investors, but may not benefit broader growth.
  • "Things that bond markets care about...can actually help...get more interest rate cuts that might benefit gilts. These aren't the things that the rest of us want to see." – Ian Smith (17:47)

8. Global Connections and the US Influence (18:18 – 19:14)

• UK market stability partly depends on calmness in the much larger US Treasury market: "The US market really pulls everyone else around." – Katie Martin (18:30)

Notable Quotes & Memorable Moments

• On the OBR Chair’s Resignation:
  "He fell on his sword over this...not something that has caused really a big market reaction. It was largely what people thought would be the inevitable consequence." – Ian Smith (04:01)
• On Fiscal Credibility:
  "There is a reasonable question...are they really going to do this running into a general election or not?" – Katie Martin (09:15)
• On Political Risk and Market Constraints:
  "The problem is the bond market does set your cost of borrowing. So if you paid no heed to what bond investors think...they have done in periods of history...just stop buying your debt, forcing up your borrowing costs, and then you have to change course." – Ian Smith (14:40)
• On the Unhedged Podcast’s Influence:
  "Let's just make Sterling the reserve currency of the world. Start right here." – Katie Martin (15:42)
• On the Real-World Limits:
  "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." – Katie Martin (13:51)

Timestamps for Key Segments

| Segment | Timestamp | |-----------------------------------------------|------------------| | UK budget’s chaotic rollout | 00:30 – 04:47 | | Gilt market's steady reaction | 04:47 – 09:38 | | Changes in bond market structure | 09:38 – 13:24 | | Political risk & international comparisons | 11:50 – 13:34 | | Myth of defying the bond market | 13:34 – 17:13 | | US reserve currency privilege | 15:12 – 16:25 | | Winners and losers of the budget | 17:13 – 18:18 | | US Treasuries’ global influence | 18:18 – 19:14 |

Tone and Style

• Conversational, witty, self-aware, and unafraid to poke fun at the intricacies of finance or themselves.
• Clear, accessible explanations for non-expert listeners, balanced with enough detail for market enthusiasts.

Conclusion

The episode delivers a nuanced look at how UK fiscal drama interacts with global capital markets and investor psychology. The key lesson: Regardless of political turmoil, the bond market’s discipline is real, immediate, and cannot be ignored—unless you have the unique privilege of being the US. For the UK, fiscal credibility matters, and this budget, messy as its rollout was, succeeded in reassuring investors for now.

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