The events throughout the Ashes Test match at Lord’s were truly remarkable. During one of the rare quieter passages of play I was chatting to one of London’s major bond market participants.
Our conversation turned to another extraordinary period of turmoil, the mini-Budget of last September and the financial markets meltdown that followed.
His sobering view was that bond investors will never again view gilts — and the British Government as a borrower — in quite the same way again. Centuries building a reputation as one of the world’s most responsible and prudent issuers of Government bonds had been trashed in days as investors looked on aghast.
For the foreseeable future, he said, bond markets would not take the utterances of the British Prime Minister and Chancellor on trust as they once did.
They would be scrutinised far more closely for any signs of fiscal back-sliding that could once again set the alarm bells ringing.
That might explain why market expectations of interest rates are so much more pessimistic than those of City economists. They are now pricing in an 83% chance of another half-point rise to 5.5% in August with borrowing costs peaking at above 6% and staying there well into 2024.
That matters. In a world where fixed rate mortgages dominate the market the duration interest rates stay high counts almost as much as the peak level they reach.
For every month they stay high thousands more home owners will roll off their 2% deals to be smacked in the face by the financial equivalent of a bouncer with rates at three times that level — or even more.
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