There are no bond market vigilantes

Just to remind everyone, there are no bond market vigilantes. No one at all is looking at UK government policy and deciding that oooooh, no, we don’t like that, we’ll punish them into not doing it. What does exist is some number of money managers - our own pensions, insurance companies, Johnny Foreigners and the rest - looking at UK government borrowing promises (the things we call “gilts”) and sucking teeth over what they think they’re worth. Should we put that money into gilts, or euobonds, or shares, or US Treasuries, or housing, commercial property or, well, mebbe just straight cash in the vault is best?

That’s it, that’s all there is.

The prime minister’s allies have sought to argue that avoiding bond market provocation should be reason enough to save him. Others appear willing to put the City’s warnings to the test.

The Merseyside MP Paula Barker, an ally of Andy Burnham, has suggested financial markets would “have to fall into line” should the Greater Manchester mayor find a route to Downing Street.

Meanwhile, the leftwing grandee Diane Abbott suggested that MPs “might as well go home” if bond market considerations trumped other priorities.

The bond market considerations are “what price?” and no more. If government is going to spend more, or borrow more, or inflation will be higher - or spend, borrow less, reduce inflation, whatever - then the price at which gilts look like a good home for the money under their management will change. This is to get the issue right:

Markets can cope with ideology of any stripe …

Quite so, markets just change the price. You may not like the price that markets decide upon of course but prices are information. They’re the price at which people will lend you their money given what they think the future holds. Change what you say about the future and the price will change. Shrug.

There are no vigilantes, just people trying to decide what your promises will do to the value of money and thus home in on the price at which you can have some of their money.

Tim Worstall