I am publishing this again as it is live news, for those who did not see it last time.
As someone who studies bonds and sometimes writes about them I dread the times when they become leading news items. It is usually for a bad reason. Markets can get in a panic if governments issue too much debt or if inflation takes off, hitting the value of the bonds and driving up the interest they pay the saver. It leads to a lot of fevered and often badly informed commentary on the media, as the media accept the credentials of some “experts” who struggle to explain a bond in simple language or in some cases struggle to understand the bond themselves.
A bond is a government debt. Many governments like the UK and US borrow large sums from the banks, pension funds, insurance companies and the investing public. They do so by issuing a large new debt for anyone to buy a small portion of the new big loan. The buyer gets an electronic certificate that they have bought a share of the debt which states how much interest they will get on their investment, and when they will get their money back. The UK government will borrow the money for a specified time period with a fixed repayment date (the duration of the loan) and will guarantee to pay a fixed rate of interest every six months throughout the duration of the bond. Inflation linked bonds are different.
These bonds are a convenient way for funds and savers to invest. They know exactly what rate of interest they will get, like making a fixed rate savings deposit with a bank. They know exactly when they will be repaid. More importantly, they know that if their circumstances change and they need to get their money back in a hurry, they can sell their bond to someone else in the market any time it is open. So far so good.
The catch is if you do need to sell before the repayment date, you might not get back the amount you paid the government in the first place, or the amount you paid to buy the bond in the market. If interest rates go up in the meantime the value of your bond in the market goes down, as people will want to get a higher income on your bond than you are getting. They can only do this by paying you less for the bond than the original issue price because the amount of interest paid is fixed. The interest paid is then a higher percentage of their cost of the bond than it was of your original cost of the bond. A bond with no repayment date (like a stock with a very distant repayment date) issued with a promise to pay 1% interest annually will halve if the interest rate goes up to 2%, as the £1 guaranteed interest stays the same so to get 2% on that bond you can only afford to pay £50 for £100 of the original issue. £1 interest is 1% of £100 and 2% of £50.
Where I often part company with the commentariat is when I hear them say these government bonds are safe assets. If you or your pension fund had bought the UK government’s 0.5% 2061 bond at issue you would be sitting now on a 77.5% loss on your original purchase price. So if you had bought £100 worth you could sell it today for just £22.40. These longer dated government loans or bonds are highly volatile. Before covid the Bank of England and the UK government issued a lot of debt at very low interest rates with repayment dates many years ahead. Once interest rates started going up to deal with a bad inflation, you were bound to lose a lot of money if holding these investments. It is true that if you wait until 2061 you will get your money back, but in the meantime you will only be getting an unacceptably low 0.5% on your money when a savings deposit or a shorter dated government bond would pay several times that. If you own the 4.25% UK gilt repaying in December next year you can sell your £100 worth of that for £100 today, or hold and enjoy the 4.25% annual interest for the remaining year and bit when the government sends your £100 back.
It is true that a government bond from a reliable state like the UK or US is safer than some corporate bonds issued by some companies. They might go bust, or get into financial difficulties so they delay or cut the interest payments. The US and UK have met all their interest payments in the past and are very likely to continue to do so. That has not been true of all other governments with some failing to meet payments when they have got into financial difficulties. Germany signed a 1953 Debt Agreement cutting some of its debt obligation by agreement with its creditors. Brazil reneged on some debts in 1987. Since 2020 Sri Lanka, Argentina, Ghana, Zambia, Ecuador, Ethiopia and Lebanon have all defaulted or suspended some payments on debts.
It is untrue to say that any government bond with a very distant repayment date is “safe”. In times like today those bonds will sell off to low prices. They can be ravaged by inflation at any point in their long lives. Both the US and UK governments are having to pay a much higher rate of interest on their borrowings today than at any time this century. That is because they have already borrowed too much and are refusing to rein in their high levels of new borrowing which places more strains on a reluctant bond market. The danger is a doom loop, where higher interest rates drive up the amount government has to pay in interest charges on its debts, which in turn worry the markets as these could become unaffordable.That happened to the UK Labour government in the 1970 s when it ended up having to pay 15.5% on one of the bonds it issued. It then of course had to announce spending cuts to try to get back in control of its runaway finances.
September 3, 2026
The missing piece of information from your piece Sir John is that banks are forced to hold these pieces of paper.
So the 0.5% issue was required holdings for stress test.
This means that government can borrow even when the market would rather they didn’t
September 3, 2026
Plus we have controls on what “investments” annuity/insurance companies etc. investments have to hold hold.
On August 27 at a Paris business event, EU Commission President Ursula von der Leyen called Europe’s roughly €10 trillion in bank deposits ‘lazy’ and outlined a ‘Savings and Investment Union’ to channel them toward scaling up continent companies.
They will pretend it is still your money – but will tax it to death and tell you how you have to invest it.
The UK government does the same and will be doing every more of this with Labour.
September 3, 2026
At the moment you can get better returns from some corporate bonds than government bonds in both UK and USA and they are lower risk to boot. The S&P credit rating for USA government bonds is AA+ whereas that for Microsoft debt is AAA.
Of course rather foolishly the UK government has also issued a much higher proportion of index-linked bonds than any other country, or the EU, and so they get punished by inflation too – it’s a lose/lose situation.
September 3, 2026
John, that is all very good but we should remember not everyone shares your concerns.
We could all adopt the socialists mindset and simply say,” don’t worry, it is only money”
The latest Labour song they champion gives an insight to the new leader’s policies.
Giving it all away, “He’s just a boy…giving it all away”
September 3, 2026
When Liz Truss crashed the economy, 10 year gilt yields spiked to 4.4%.
The Labour government has sustained yields above that since March and still climbing above the 5% level. So what does that say about what the government has done to the economy?
Yields haven’t been this high since…the last Labour government.
September 3, 2026
@Dave Andrews – how? The day before she arrived in office and before any fiscal announcements it would appear that the Establishment went into overdrive – there jobs were on the line.
September 3, 2026
She didn’t crash the economy. At first, when Bailey put up interest rates by too little and too late the day before the Growth Statement, they said she had crashed the pound. When it went up again, they changed the charge to “crashed the economy” and the parrots took it up.
September 3, 2026
Are we heading for Healey Mk 2?
September 3, 2026
Who said Liz Truss trashed the economy? Who forced her out of being PM and had her replaced?
September 3, 2026
I see that Trump has swapped gold for oil in Venezuela and the Netherlands have given gold storage to the UK. To trust others with millions of ingots makes me think that future gold stores are losing value rapidly and the need for oil overtakes any other.I heard that Venezuela has more crude oil than even Saudi and is why Trump is cosying up to Venezuela.As we are not in the EU and in direct conflict with Russia the UK may be a safer gold deposit for the Netherlands.
September 3, 2026
The way things are going the PM is doing all he can to rejoin the EU. Didn’t greet his ‘Main Man Macron’ by bowing or kneeling – just a lovely big hug.
He obviously wants to join the new ‘Made in Europe’ initiative but this is bound to push up prices as they will doubtless install Trump-style import duties.
September 3, 2026
Thank you for the education, SJ. Perhaps Labour Ministers should now read and digest it to enlighten themselves. Mr Burham constantly says he ‘understands people’s problems’, but what we need to hear is his costed plans to address them and tell us where the money is coming from! Lest the Bond Markets react adversley to his plans and he recieves a “Liz Truss” moment!
September 3, 2026
Correlation between today and and last time Labour were in office,
Brown was PM and Burnham was Chief Secretary to the Treasury
June 2007 the rate was 5.21%
Today the rate is 4.85%
Liz Truss is credited with a rate of 4.25% the day before she took office and before any fiscal announcements.
Then in the opposing camp the BoE will sell/offload the Bonds at another date at a discount and hand the loses directly to the taxpayer.
Its the Socialist trap, keep spending and at a future date some one else will have to figure it out, We have had spending announcement after spending announcement, to pay for it we see more and more contrived ways to tax. Only have one brain cell between the lot of them in Parliament means they aren’t able to compute, understand, comprehend that ‘Tax’ is the removal of money from the economy. Then it doesn’t dawn on them that no economy equals no real earnings and the tax pool dries up.
Need to keep parroting ‘it the economy stupid’
September 3, 2026
The problem is that the warning signs are there, but there are none so blind as those who will not see. There is no sign that Healey or Burnham realise how close to a financial crisis they are. Not a word about cutting government spending to balance the books. Nor any awareness from Labour MPs.
What does it say about our education system that this Labour government and its supporters are so ignorant of basic economics? As for PPE degrees, it seems there is lots of P & P, but virtually no e!
September 3, 2026
apologies for a wrong allusion yesterday I thought Jacob had the multi coloured coat when in
fact he gave one to his son Joseph causing great jealousy amongst his brethren
September 3, 2026
Today’s big moment, come on we all need a laugh when the UK Parliament is so dire why spoil it…….
Zack Polanski has confirmed he will stand to be the Green candidate in the Holborn and St Pancras by-election. He told the Camden New Journal:
“I have lived and worked in this community over many years, I know it well and I love it. It represents so many of the things that make London so special. I am so excited by the prospect of representing this place in Parliament…
“It’s a clear fight between Labour and the Green Party. We know that people are struggling – that the things we used to afford are increasingly out of reach – and this is a chance to send a very clear message that we won’t sit by as we get poorer and extreme wealth is concentrated at the very top.
As reported in Guido https://order-order.com/2026/09/03/zack-polanski-announces-intention-to-stand-in-holborn-and-st-pancras/
September 4, 2026
I see the banana republic clown court service we have has been able to instantly change the guilty verdict when the person involved is the mayor of London… shame the rest of us get no such justice. ever more tiers to the criminal justice system in this country.
September 5, 2026
Excellent explanation. There is something about bonds that makes then counterintuitive to the uninitated. Phrases like ‘in bad times your bond yield goes up’. Surely it should go down like interest on your savings? And surely an increasing yield is good? When I left the Navy, one of my resettlement courses covered bonds and at the time I found them strangely weird. Why I do not know but cause and effect in statements about bonds often seem at first to be back to front. But the logic is perfectly clear as in Lord Redwood’s explanation. I had already gained a management and finance degree by part time study and I had no difficulty understanding equities and business finance and accounting including debt financing. But bonds were definitely weird. It took me a long time for understanding to grow.