What’s bothering bonds?

Summary

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Unhedged Podcast — Episode Summary

"What’s bothering bonds?"

Date: May 14, 2026
Hosts: Katie Martin, Robert Armstrong
Guest: Dara McFadden

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Episode Overview

This episode tackles the current turbulence in global bond markets—focusing especially on the UK’s government bond ("gilts") market but expanding outward to discuss why borrowing costs are soaring globally, why the UK is particularly exposed, and what all this means for both markets and regular citizens. The team breaks down the intersection of political instability, inflation, monetary policy, and investor sentiment, with plenty of sharp wit and memorable moments along the way.

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Key Discussion Points & Insights

1. Why Are Bonds "Unhappy"?

• Bond prices are down globally, driving up yields and making borrowing more expensive (00:32).
• The UK gilt market, smaller than the US Treasury market and more volatile, is experiencing acute stress due to domestic political crisis and global trends (03:11, 03:49).
• The cost of servicing UK public debt has spiked: "One pound in every pound ten the public sector spends now goes on debt interest, which is four times what we spend on nurses." — Katie Martin (07:55)

2. What's Different About the UK?

• The UK is not in the eurozone; its yields are much higher than even Italy’s, despite Italy’s notoriety for fiscal risk (04:19, 04:33).
• Sterling vs. euro dynamics: “We use sterling. So it's like, it's not quite comparing apples with apples…We don't have the same central bank.” — Katie Martin (05:28)
• Lack of eurozone backup: UK lacks the alphabet soup of European Central Bank rescue programs that stabilize eurozone members’ bonds (06:08, 07:02).

3. Structural & Political Vulnerability

• The UK carries high debt as a share of GDP and increasing reliance on foreign investors for its bonds. If investors lose confidence, they can easily move their money elsewhere (07:41, 08:55).
• Political uncertainty after tough local elections is making gilts less appealing: if parties from further left or right appear more likely to win power, market discipline becomes critical (10:43).

4. Misconceptions: Can the Bank of England Save the Day?

• Why doesn’t the Bank of England buy all the bonds?
  • "If you have the central bank monetizing the debt…there’s no constraint on the government's ability to issue or make spending commitments. That can contribute to inflation." — Dara McFadden (11:25)
  • Heavy central bank bond purchases are sometimes necessary in crises but are inflationary if sustained (12:08).
• Issuing in euros instead of sterling: Poses new risks—currency depreciation makes repayment harder, shown by historical examples in Eastern Europe and the Asian financial crisis (13:18).

5. Why Isn’t the US Suffering as Much?

• The sheer size and liquidity of the US Treasury market, plus dollar’s reserve currency status, gives it a luxury nobody else has: "In global bond markets, it pays to be the biggest." — Rob Armstrong (14:25)
• The US can "get away with stuff"—higher deficits, bigger bond sales—because it's the preferred destination for global capital (14:56).

6. The Global Angle: Why Yields Are Up Everywhere

• Rising yields are not just a UK phenomenon; even Japanese 30-year bonds are near 4% and US long bonds broke above 5% (15:29).
• Key drivers:
  • Lingering inflation fears ("We're in a 3% world, people." — Rob, 17:52)
  • High government borrowing for defense, green energy, etc.
  • Market demands higher yield to compensate for perceived fiscal irresponsibility.

7. Outlook: What Comes Next?

• UK’s pain could worsen before improving, especially with possible changes in political leadership: more spending could further spook bond markets (18:42).
• Yet, "the bond market generally has a way of imposing discipline and constraints on governments that get a bit too out of hand." — Dara (19:17)
• The hosts suggest the UK and other developed economies may have to adapt to a “permanently higher debt and higher yield world”, accept more inflation, or cut back spending (20:04, 20:26).
• Ongoing question whether 2% inflation targets are realistic post-2022 energy crisis (20:38).

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Notable Quotes & Memorable Moments

"Bond prices are down, which means borrowing costs are cranking higher all over the world."
— Katie Martin (00:32)

"I am looking at a screen here… nobody is close to the United Kingdom at 5.01%. Italy 3.78. Italy! Not all respect to Italy, but fiscal responsibility is not their national motto."
— Rob Armstrong (04:33)

"If you give people a reason not to buy gilts, then maybe they just like won't buy gilts."
— Katie Martin (10:45)

"Issuing bonds and having the central bank buy them is printing money."
— Rob Armstrong (12:11)

"In global bond markets, it pays to be the biggest. And the U.S. is the biggest."
— Rob Armstrong (14:25)

"We're in a 3% world, people… And over time the difference between 3 and 2% is large, compounds into a big amount."
— Rob Armstrong (17:52)

"I think we're just adjusting to a new world of permanently higher debt levels and aging demographics and we will find some way to accommodate this additional supply."
— Dara McFadden (20:04)

"They're less of a target and more of a floor, now."
— Katie Martin, on inflation targets (20:54)

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Memorable Lighthearted Moments

• Rob Armstrong’s eternal search for his “special chair” to keep him from wiggling. (01:40)
• Dara McFadden’s first impressions of the FT's “anarchic” newsroom: “There are no rules and no one is in charge.” (02:21)
• Rob goes “short shampoo”: "As every bald person knows, a frivolous product that the world does not need." (22:44)
• Dara’s "short" on Limebikes: "At least around East London, where I live, it's not uncommon to see them at the bottom of the canal." (24:02)

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Timestamps for Key Segments

• UK bond market context: 03:11–11:11
• Currency and political factors: 05:28–07:55
• Central bank & monetary policy misconceptions: 11:25–14:03
• Why the US is different: 14:25–14:56
• Global bond market stress & inflation: 15:29–17:52
• Outlook and adaptation: 18:42–20:38
• Long/Short Segment (lighter fare): 22:08–24:02

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Conclusion

This episode offers a sharp, engaging exploration of the storm buffeting bond markets—blending clear financial analysis with wit. As borrowing costs rise and political uncertainty looms, the hosts make a compelling case that nobody—least of all the UK—can ignore the bond market. Ultimately, whether from the dungeons of FT Towers or the trading screens of New York, the message is: bonds demand respect, and we may all have to get used to a world of higher yields.

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For further reading and future episodes:
Unhedged Podcast Feed

Transcript

[A]

From globalization to innovation sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle. To further inform your view, listen to the Flipside on your favorite platform.

[B]

Pushkin. Stock markets are so hot right now. People keep telling me with a straight face that the biggest risk in stocks today is that we're not taking enough risk in stocks. Let's see how that one ages, shall we? Anyway, meanwhile, bonds. Not happy. Like, they're really not happy. Bond prices are down, which means borrowing costs are cranking higher all over the world. Meanwhile, the UK has done what it does best and manufactured a political crisis out of thin air. So UK government bonds or gilts are really feeling the heat today on the show. What's bothering bonds? Why do normies care? And how can the UK avoid making a bad situation worse? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist. Down in the dungeon at FT Towers in London, which is inexplicably freezing cold. I'm joined, as usual by the big man in New York City, Mr. Rob Armstrong. Rob, do you have your special chair again to stop you wiggling?

[C]

It's got me locked in place again.

[B]

Good.

[C]

This is what it's come to.

[B]

I'm joined right here in the London studio by our newbie on the unhedged newsletter, Darren McFadden. You've been at the FT for like a month. You came from, from, from the bank of England. You came from a proper job. How are you? How are you liking our funny ways? Is it a very different place to be?

[A]

I mean, it's basically anarchic. I think my, my imagination of how a newsroom functioned would have been an editor stood atop a command structure, asking for this by 5 o', clock, this for tomorrow. And instead it all just comes together with everyone just doing their work.

[C]

This is what I, I tell this to every time someone joins the ft. They say, you know, what do I need to know? And I tell them there are no rules and no one is in charge. And they think I'm joking. And then they work here for a couple of months and they come back and they're like, oh, you weren't kidding. Yeah, there you go.

[B]

Yeah, yeah. Let's just hope the editor doesn't hear this.

[C]

Yeah, Good heavens. Yeah.

[B]

It's quite a Grand building, the bank of England, isn't it? It's like part of old London. It's one of the bits of old London that didn't get bombed back in the day. It must have been kind of quite a special place to work.

[A]

Yeah. Weirdly I mean from the outside it looks like a beautiful building, but there are all sorts of downsides to working in a, you know, hundred year old building. Now that's single glazed windows, it's very drafty, you have to walk 10 minutes to get to any meeting room.

[B]

Yeah.

[A]

So it is a relief to work in a more modern office building.

[B]

We're dead glam here. So look, we're the ft, we're a London institution. So let's start with the uk. The UK has got itself into a bit of a pickle here. Right. Like so the UK government bonds market, which everyone calls the gilts market over here, like we borrow a lot relative to the size of our economy, but we're like really tiny in the global scheme of things. We're much smaller than Treasuries and so that does mean that we sometimes muck it up and guilts get really volatile. In a nutshell, Dara, what is going on at the moment?

[A]

Well, to start with, yeah, like you said Katie, the size of the UK guilt market is a lot smaller than the treasury market. So there's a lot of more of a risk that investors in gilts would lose interest in being invested in gilts. At the moment the UK is in this very tricky situation of being at the center of both global dynamics that are pushing up yields internationally and a sort of political crisis taking place in the UK now which is adding to the yield on the longer dated gilts.

[C]

Can I provide some context here as the crass American, I am looking at a screen here that has all the European bond yields on them, the 10 year bond yields.

[B]

I know where this is going.

[C]

And nobody is close to the United Kingdom at 5.01% as of this morning. Italy 3.78. Italy. Not all respect to Italy, but fiscal responsibility is not their national motto. And I just don't understand why the United Kingdom is so out of whack with the rest of the continent.

[B]

Are you aware Rob, that we're not, we're not in the Eurozone?

[C]

You know, I said the continent and I think the islands that make up the United Kingdom as part of the European continent, the same way Long island is part of the North American continent,

[B]

the same way Canada is part of the us.

[C]

This is unhedged. The Geography podcast, maps on the radio.

[B]

So look, part of it is we're not in the same currency. Like, you know, Italy uses the euro, Greece uses the euro, France uses the euro, Germany, yada yada, we use sterling. So it's like, it's not quite comparing apples with apples. And we don't have the same central bank, so we don't have the same bank base rate between the two. So, like, European benchmark interest rates are like 2%. Like, yeah. And, you know, we're at. What are we at, Dara?

[A]

We are at 4.25.

[C]

Dara actually set that interest rate before he quit that job to join us here at the unedged. That was his last.

[A]

Thankfully, I never had to work on monetary policy.

[B]

It's too hard. It's too hard. So, look, we're a different. We're at completely different starting points, but nonetheless cannot sugarcoat it. UK borrowing costs are higher. We've got more of an inflation problem than a lot of other developed market economies. We've got this piddly little bond market that's just not on the same scale as, as certainly as the U.S. and also, if you're in Europe, if you're in the Eurozone, then you enjoy like the, the. A sort of safety net from a. Like an Alphabet soup of rescue programs that are out there at the European Central bank that it can kick in for pretty much whatever reason it wants. Pretty much what, you know, whenever it wants. If, if one national bond market goes haywire in Europe, they can just hose that down.

[C]

So there's a safety and numbers thing there, basically. Maybe that's a bit of a simple backup.

[B]

They've got, you know, they've got some issues, but they've got backup. And, and it's just different.

[A]

The European Central bank is willing to kind of step in in the event that the spreads between all of the European bonds start diverging too much. That's. That's critical to maintaining a single currency area. We have a central bank that is willing to backstop the market when there's a sort of systemic risk to financial stability, as happened in September 2022. But that was to do with the business models and the balance sheets of particular sectors in the economy, like pension funds and insurance companies.

[C]

Have we hired someone who knows what he's talking about? Katie?

[B]

I know.

[C]

I thought we had a rule about this.

[A]

I'd say one other thing to bring into this, or a couple of other things. One is that the UK does have a very high level of debt as a percentage of gdp. And so, yes, it's a piddly bond market, but it is large by European standards.

[B]

You're right, we've got a lot of outstanding debt. And here's a little thing that the UK Chancellor, Rachel Reeves, is always pointing out, which is one pound in every pound ten the public sector spends now goes on debt interest, which is four times what we spend on nurses. So, like, there's this idea, like, politicians who are like, you know, on the outside of the tent pissing in, are always like, oh, we should ignore the bond market. The bond market is terrible. Why are we pandering to all these awful speculators? We should just do what we want and the bond market's going to have to suck it up. And it's like, no, no, sure, that's fine, that's a political choice, but if you do that, you. You can't afford any nurses. So, you know, I think there's this idea that the bond market is completely separate from real life and from politics and that you can afford to, like, just sort of do what you want.

[C]

That's the thing about the bond market, it's made of money. You know, this is a very important fact about it and that demands respect.

[A]

And also, you should care what proportion of your debt is held by overseas investors. So the uk, over the last couple of decades, or even less than that, over the last decade, it's seen a growing share of its public debt held by overseas investors. These are people who have choices which public debt they want to invest in, and they don't need to stay invested in gilts. If gilts don't provide a good return on investment, and if they don't think that the government has a credible strategy for keeping inflation close to target and getting fiscal expenses down, then they can shift into Treasuries or bonds or, you know, some emerging market asset class.

[C]

I noticed the Australian tenure is also paying 5%, so you can flip over to Australia and get the same yield.

[B]

And also there's the currency thing, right? So if you think sterling is going to weaken a lot, then why would you want to hold the bond? So there's a lot going on here, but. So there is a whole global situation which we'll come up. Come on to in a minute, but in the meantime. So while we have got borrowing costs pulling higher across the whole of the world, and the UK is quite sensitive to that anyway, in the middle of all that, we've had some local elections in, in, in the UK that have been like a big punch in the nose. For Prime Minister Keir Starmer, all of a sudden other people in and around the, the Labour government want to get in on the act, want to like, you know, oust him out of his job. It also looks like other parties that are much more to the right or to the left are kind of more credible. They've got a more credible claim on government really in the next general election. So again, like just as Dara was saying, if you give people a reason not to buy gilts, then maybe they just like won't buy gilts. And there's an element of that that is making the situation for the UK market a little bit worse.

[C]

Shall we go to the world now? Shall we broaden the lens to the world?

[B]

Well, just really quickly before we go to the world. So I wrote at the weekend about, look, bond markets are important and bond markets are our friend and if politicians had any sense in the uk, they would stop antagonizing the bond markets and just accept some of the constraints and trade offs that we all live with. I got feedback on that from people on the Internet. Some of it constructive, some of it not, but some of them were like genuine questions that I think are not stupid. One of them was, well, why can't the bank of England just buy all the bonds? Dara, why can't the bank of England just buy all the bonds?

[A]

Well, the bank of England has bought a lot of the bonds over the last 18 years. It is now selling a lot of them back into the market. That's part of the reason that the yield has been pushed up. But one reason you don't want the central bank to be an outright holder of a large proportion of the, of the public debt is that that can contribute to inflation. You know, if you have the central bank monetizing the debt, then there's no constraint on the government's ability to issue or to make new spending commitments. So it is in principle it's a good idea to have a central bank with a relatively smaller footprint in financial markets and allow the price discovery to take place in the market.

[B]

Yeah. Because if inflation gets out of hand, bonds really hate that.

[C]

I mean it's printing money, right? Issuing bonds and having the central bank buy them is printing money.

[B]

You're not wrong. And it's fine in a crisis, right. You know, to get you out of a hole, everyone says, oh, you know, we, we hate printing money. Oh, oh, there's a massive recession, you say, sure, I'm going to print that. So you know, money printer go brrr. But generally speaking it's just not a smart thing to. To do.

[C]

It's inflation.

[B]

So that's. That's why the bank of England doesn't just buy it all. Another question that someone was asking me and I can't tell whether they were being entirely serious. Serious. But to Rob's point, why doesn't the UK just issue all its debt in euros if the yield is cheaper there?

[A]

Well, we've heard this recently. There was a column in the FT actually, from somebody suggesting this. But again, it kind of comes down to the point about what view you want to take on the value of sterling and whether that's going to stay constant or depreciate. And so it would be a bit of a punt for the government to start doing that.

[C]

And it makes local. Oh, I'm sorry, I keep interrupting. Even worse than usual. Go ahead, Katie, please.

[B]

And like, if. If we Brits issued everything in euros and then the value of the euro went up a lot, for whatever reason that we can't control, then we're screwed and we're suddenly paying back debts that are much, much more expensive. So various countries in Central and Eastern Europe, Poland and Hungary, they had lots of, like, back in the day, they had loads of debts, like mortgages that were in Swiss francs. Anyway, Swiss franc blasted higher. A lot of people got absolutely annihilated. So if you're not issuing in your own currency, you're introducing risks that kind of don't have to be there.

[A]

This is what happened during the Asian financial crisis, where you had all of these countries in Southeast Asia who had issued debt in US dollars, and then when the money flowed out, they didn't have the dollars to make those interest payments.

[B]

Yep, yep. So bad things can happen. The third sensible question that people have been asking me about why the UK market is in such a hole is, look, if bond investors like it so much, if governments are boring and sensible, then why is the US government bond market not bleeding out at the moment? Rob, I will throw that to you.

[C]

I think it's because of the size, liquidity and structure of the market, rather than the quality of the asset. So it's a universally accepted, highly liquid, large, easy to access market in a currency that everybody understands and wants. So in global bond markets, it pays to be the biggest. And the U.S. is the biggest.

[B]

Yeah. The U.S. has this exorbitant privilege of being the world's dominant reserve currency, dominant reserve asset. It can get away with stuff basically that no one else can. So if the Brits try and be all American Then we get absolutely flayed for it. As we were saying right at the top. Like the, the real problem with what's going on with gilts at the moment is that everything is, is, is really under the cosh. So even Japanese 30 year bond yields are getting close to 4%. The US just earlier this week had to issue. Was it 10 year debt, Rob, or 30 year debt?

[A]

30 year debt over 5% for the

[C]

first time in decades. It's a 5% yielding piece of the United States government. This is a big moment.

[B]

Robert Armstrong, tell us why this is happening.

[C]

Well, I think it's, it's global to a certain degree. I think there are global concerns about inflation and probably even more than that, there are global concerns about fiscal responsibility on the part of the, you know, the developed world's governments.

[B]

Right.

[C]

So we want more, we want more yield because we want more inflation insurance. But more importantly than that, the developed world is more and more indebted. So it's worse and worse a credit. And so you need a little bit more.

[B]

So things that bonds hate include inflation and they hate having loads and loads of bonds. You know, it's just a supply and demand thing, right? If you have loads of bonds flooding the market, then the value of those things goes down. What we're looking at partly as a result of what's going on in Iran is inflation and loads and loads of new bonds to help governments pay for defense and green energy transition and all of that sort of stuff. So it's just a combination of stuff that, that bond investors really hate and like. So just earlier this week there was some nasty inflation data out of the States, right Rob, that you had PPI inflation. It's like wholesale inflation, sometimes called like factory gate inflation, like what producers are

[C]

paying rather than what consumers paying. It's like, you know, CPI for companies basically. And it was very high. It's all the inflation numbers are a bit weird now because the energy crisis makes everybody a little, makes all the numbers a little jumpy for reasons and companies are changing prices quickly and so forth. I wouldn't say that either the recent CPI data or the recent PPI data radically changed the picture of inflation in America. It was more like confirming inflation is not dead. And everybody hopes the next report will be the one that shows we're going back to normal. 2% is in sight and each report comes out and it's just like we're in a 3% world, people.

[B]

And so US PPI inflation that came out earlier this week was up 6, 6% year on year.

[C]

And there was some one timers in there, whatever. The point is 3% world not getting better. 3% and not improving. That's not, it's not the 1970s, it's not, you know, nobody's paying for groceries with a wheelbarrow full of money. But we're not supposed to be at 3, we're supposed to be at 2. And that. And over time the difference between 3 and 2% is, is large compounds into a big amount. So it's important.

[B]

So what do we think? Let's take it back to the uk. What do we think happens next? Like Dara, what are your Spidey senses? Do you think this is all going to get a lot worse before it gets better? Or do you think this is a bit of flim flam but nothing.

[A]

I think it could get worse before it gets better. I think one of the risks here is that there could be a challenge to Sir Keir Starmer, the Prime Minister. And depending on who comes out tops in that contest for the leadership of the Labour Party, there could be a swing or a lurch to the left that means slightly more spending, more social commitments. And it's just not clear that the bond market really wants to absorb all that additional borrowing. So there's a real question there around whether the bond market is going to kind of reimpose discipline on whoever comes into power if Keir Starmer leaves. And in fact there was a column in the FT yesterday arguing that you could actually be long on gilts because the bond market generally has a way of imposing discipline and constraints on governments that get a bit too out of hand.

[B]

I think a lot of Brit investors who I speak to are like, yeah, this is a pretty bad situation. People outside the UK are like, oh God, you Brits will figure it out. You always figure out like, I don't know, I don't know how you're going to make this work, but you're going to make it work. You're not going to do another like Liz Truss thing end of 2022. You're not going to like throw a grenade at your national bond market because you saw that ended quite badly last time. So let's not do that again.

[A]

But like, basically my view, I think we're just adjusting to a new world of permanently higher debt levels and aging demographics and we will find some way to accommodate this additional supply. Whether that's central banks buying it or cutting social spending, something or deciding you're

[C]

okay with the 3% world or whatever the number is. It's a way you make debts lighter is you tolerate a bit more inflation over time and the debts automatically lighten over time.

[A]

Yeah, Very few advanced economies have gotten back to their 2% inflation targets since the energy spike in 2022. And so the question is whether they even have 2% inflation targets anymore. Are they able to meet them over the medium term or not?

[B]

They're less of a target and more of a flaw. Now I think we can all agree we should have all taken advantage of zero interest rates, borrowed like mad, piled into green energy. Maybe we wouldn't be in the situation.

[C]

Somebody on this podcast has a 2 1/3 mortgage for 30 years. I'm not saying who it is, but. But he's feeling pretty good about life.

[B]

You and your 30 year mortgage suckers. So look, the moral of the story is, yes, we have a problem here, but everyone just calm the heck down about the uk otherwise I'll get very grumpy about it. Okay, we're going to be back in just one second with longshore.

[A]

Bull or bear trade or tariff future or fad. There's more than one side to every story. With the Flip side podcast from Barclays Investment bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flip side on your favorite platform.

[B]

Alrighty. 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. I will go first. I had a tough assignment this week. I went to an event in Paris. I just want to go along. There's a little shop in the Gare du Nord when you're about to get the train back to London that sells delicious little macarons. And they are very, very good. It's about like €35 for a box of these things to take home. But they, they are fine. And they, they always make up for, for me being away for a few days. Guys, what do you got? Rob, what are you saying?

[C]

I am short shampoo, which is, as every bald person knows, a frivolous product that the world does not need.

[A]

Rob, you should be going long shampoo because of all of the hair treatments that are coming in these days.

[C]

Good point. That's a good point, Dara. Thinking like a trader. I like that. I like that.

[B]

Dara, what are you saying? What's your inaugural? Long shorts.

[A]

So it was reported this week that Limebike is going to IPO at some point soon and they're a blight on the streets of London. I would say, because they encourage a lot of people who are not regular cyclists to get on bicycles with an electric power assist and zigzag in all sorts of directions.

[C]

I don't understand why there haven't been more accidents.

[A]

Well, there have been.

[B]

Yeah. Yeah.

[A]

In emergency rooms here, doctors have taken to calling a new kind of injury line bike leg, which is when your leg is broken from one of the bikes falling on your leg.

[B]

Before the lime PRs get onto us. I'm sure some people have a very nice time on lime bikes. I'm just saying I find them annoying.

[A]

Right. And the reason I'm short lime bikes is that I don't believe they last very long. I don't know what the shelf life of a lime bike is because at least around East London, where I live, it's not uncommon to see them at the bottom of the canal.

[B]

So there's an IPO to watch those annoying little green bikes. Chaps, we're going to have to wrap up listeners. That's it for today. We are going to be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.