HAMISH MCRAE: Bond vigilantes will save us from Labour's recklessness
The markets took an adult view of Thursday's elections. They don't go a bundle on the Starmer-and-Reeves team's ability to run the nation's finances, hence the fact they charge us more to borrow than any other G7 state.But the initial results didn't change much. They know there will pretty soon be a change of Chancellor, and probably Prime Minister too, but they will deal with that as and when it happens.Meanwhile, bookmakers' odds on Sir Keir's survival actually improved on Friday, which, coupled with a fall in US Treasury yields, meant that the yields (interest paid) on gilts (UK Government bonds) fell a bit too.Maybe the markets will take a more hostile stance in the weeks ahead but for the moment it's business as usual.What we have been reminded of though is that the Government is their prisoner. Andy Burnham recognised this with his infamous remark: 'We've got to get beyond this thing of being in hock to the bond market.'It was a seriously stupid thing to say and he was forced to qualify it, with the words: 'I have never said Britain should ignore the bond markets. What I do say is that it is the decisions of politicians from the 1980s onwards that have left us in hock to them.' Startled: The bond vigilantes have feckless Chancellor Rachel Reeves in their sightsHe got his timing wrong. We've been in hock to the markets since the Second World War, with progressive devaluations of the pound, the first in 1949, the emergency loan from the International Monetary Fund in 1976, being kicked out of the Exchange Rate Mechanism in 1992, and so on.We will remain in hock until we have a Government that can convince the world it is serious about controlling public spending – and Burnham demonstrated he doesn't grasp how things work.This is not to be beastly about the person leading the odds to be the next PM. It is simply to point out where power truly lies.Freedom from the bond markets means not having to borrow so much from them.What I fear may happen over the next two years is this. It is that the next Prime Minister and Chancellor, whoever they may be, will face a funding crisis.There will be a surge in gilt yields and a run on the pound. There will then be an Emergency Budget, with cuts in spending and further increases in taxes, the latter presented as temporary and directed towards the better off.The trigger for all this may be internal – a hard-Left Labour leader or simply a stupid one – but it may be external, in the sense it has nothing to do with the UK, but we get caught up in an international financial crisis. The problem there would be that, while objectively the UK's finances may be no worse than those of most other G7 nations, we are first in the firing line.That may seem unfair, but it's a reputation thing. What goes down well with too many Labour backbenchers if you are trying to become leader is poison to the bond markets. I don't think a global financial meltdown is around the corner, but there are plenty of reasons to be worried.At some stage there will be another world recession and a bear market for equities. Government borrowing everywhere is unsustainable. Inflation will remain above the target of 2 per cent for the foreseeable future. So there has to be a reasonable chance of a sharp setback in the next two or three years.What to do? What most people are already doing – hunkering down. Household savings are at 10 per cent of disposable income, up from 6.5 per cent in the five years up to the pandemic.It is depressing to see governments waste money, and voters have given their verdict on this lot. But those of us who want our Government to be more responsible with the nation's finances have a mighty band of warriors fighting on our side.They are called the bond market vigilantes, the global investors who punish governments that over-borrow and allow inflation to soar.They are back on duty, fully armed, and they have Rachel Reeves, and her successor, and doubtless the Chancellor after that, in their sights. It will be the bond vigilantes that save us from Labour's recklessness.DIY INVESTING PLATFORMSAJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you
