Connect with us

Published

on

Except on rare occasions – last year’s post-Liz Truss mini-budget episode being one of them – the bond market rarely garners as much attention as other financial sectors.

Yet these markets, where companies and governments come to borrow, are the foundations for the global economy.

In particular, the value of government bonds – and hence their imputed interest rates – have an enormous bearing on all our lives. Higher bond yields, as these interest rates are called, imply that we will all be paying more interest on that debt for years to come.

So the fact that these interest rates are shooting up rapidly around the world in recent weeks is no trivial matter. On Monday morning, the yield on US 10-year debt (typically seen as a benchmark for this market) broke through the 5% mark.

The UK’s own 10-year government debt is, at 4.7%, now above the highs it hit following last autumn’s mini-budget.

The 30-year UK government bond yield just hit the highest level since 1998. This is big stuff – and indeed the degree of yo-yoing in recent weeks has been unprecedented.

Something is clearly going on in these markets, but what?

This is where things get a little murkier, because it turns out there is no single, definitive explanation for these fluctuations. That comes back to a broader point, which is that the price of a given country’s debt is telling you lots of things at the same time.

It could be telling you about future expectations for where central bank interest rates are heading in future. At one and the same time, it could be signalling how much demand there is in capital markets for a given country’s debt. It could equally be caused by supply: if a government is issuing lots of debt, you might reasonably expect people to ask for higher interest rates to lend them that money.

And the explanation for the recent rise in bond yields could well be all of the above.

A lot of debt

It’s worth saying, before we go into it, that most of this shift seems to be centred on the US economy – but any rise in Treasury yields (those US government bonds are typically referred to as “Treasuries”) has a direct impact on the rest of the world. So it matters for everyone.

Anyway, let’s take the central bank thesis first. Up until quite recently, most economists and investors had been assuming that having risen sharply in recent years, official central bank interest rates would be cut quite rapidly next year – that the shape of the future interest rate curve might resemble the Matterhorn, that Swiss mountain which used to be on the side of Toblerone packages until they stopped making the chocolate in Switzerland.

But central banks, including the US Federal Reserve and Bank of England, have been at pains recently to signal that those rates might not be coming down quite so quickly.

In fact, says Bank of England chief economist Huw Pill, the future path for interest rates might look a bit more like Table Mountain – a long, flat plateau of higher rates.

So that’s one part of the explanation. Another is that right now the US government is borrowing enormous amounts of money, partly to finance its Inflation Reduction Act and CHIPS Act, as well as new Biden administration welfare policies.

The combined effect is, according to the Congressional Budget Office, to lift the US national debt up to the highest levels since the aftermath of WWII.

That’s a lot of debt – and while everyone’s known about these plans for some time, it’s possible investors are only now beginning to baulk at the prospect of absorbing all that debt.

Read more from business:
Housebuilder to cut 200 jobs and take profits hit

Former Telegraph owners resist bid to liquidate offshore company
Rail ticket office closures will go ‘too far, too fast’

Dangerous territory

The final explanation, which is considerably more speculative but also more unsettling, comes back to something else.

You may recall that after Russia invaded Ukraine, Western nations talked about doing what they could to ensure Russia would pay for reconstruction in Ukraine, including potentially seizing Russian assets held in Western nations.

No one is entirely sure how this would work, but at the recent IMF annual meetings in Marrakech, the group of seven leading economies (the US, Japan, Germany, the UK, France, Canada and Italy) agreed to begin working on it.

As I say, no one is entirely sure how this should be done. It might be possible to confiscate some of the interest payments which might otherwise have been due to Russia, earned by Russian assets held in Europe.

But the G7 is also aware that this is dangerous territory, begging questions about the function of international law and the international monetary system.

It also sends a pretty clear message to other countries. If the G7 is content to start seizing Russian assets in their countries then what is to stop them doing likewise with, say, Chinese assets?

Perhaps you see where this is going. At the moment, China is one of the biggest buyers of US government debt, and there is evidence that it is slowing its purchases of US government debt.

Might that be because it’s somewhat spooked by the ongoing efforts to recoup money from Russia? Might Chinese authorities worry that something similar could or would happen to its holdings of US Treasuries if it invaded Taiwan? No one knows for sure, but this is another not altogether implausible explanation for those higher bond yields.

All of which is to say: it’s complicated. But it’s also quite scary. And higher interest rates mean higher debt repayment costs for this country in the coming years.

The ability of this government (or a possible future Labour government) to borrow to finance big projects in future depends on being able to borrow at a reasonable interest rate. And those interest rates are getting considerably higher.

Continue Reading

Business

Bank chiefs to Reeves: Ditch ring-fencing to boost UK economy

Published

on

By

Bank chiefs to Reeves: Ditch ring-fencing to boost UK economy

The bosses of four of Britain’s biggest banks are secretly urging the chancellor to ditch the most significant regulatory change imposed after the 2008 financial crisis, warning her its continued imposition is inhibiting UK economic growth.

Sky News has obtained an explosive letter sent this week by the chief executives of HSBC Holdings, Lloyds Banking Group, NatWest Group and Santander UK in which they argue that bank ring-fencing “is not only a drag on banks’ ability to support business and the economy, but is now redundant”.

The CEOs’ letter represents an unprecedented intervention by most of the UK’s major lenders to abolish a reform which cost them billions of pounds to implement and which was designed to make the banking system safer by separating groups’ high street retail operations from their riskier wholesale and investment banking activities.

Their request to Rachel Reeves, the chancellor, to abandon ring-fencing 15 years after it was conceived will be seen as a direct challenge to the government to take drastic action to support the economy during a period when it is forcing economic regulators to scrap red tape.

It will, however, ignite controversy among those who believe that ditching the UK’s most radical post-crisis reform risks exacerbating the consequences of any future banking industry meltdown.

In their letter to the chancellor, the quartet of bank chiefs told Ms Reeves that: “With global economic headwinds, it is crucial that, in support of its Industrial Strategy, the government’s Financial Services Growth and Competitiveness Strategy removes unnecessary constraints on the ability of UK banks to support businesses across the economy and sends the clearest possible signal to investors in the UK of your commitment to reform.

“While we welcomed the recent technical adjustments to the ring-fencing regime, we believe it is now imperative to go further.

More on Electoral Dysfunction

“Removing the ring-fencing regime is, we believe, among the most significant steps the government could take to ensure the prudential framework maximises the banking sector’s ability to support UK businesses and promote economic growth.”

Work on the letter is said to have been led by HSBC, whose new chief executive, Georges Elhedery, is among the signatories.

His counterparts at Lloyds, Charlie Nunn; NatWest’s Paul Thwaite; and Mike Regnier, who runs Santander UK, also signed it.

While Mr Thwaite in particular has been public in questioning the continued need for ring-fencing, the letter – sent on Tuesday – is the first time that such a collective argument has been put so forcefully.

The only notable absentee from the signatories is CS Venkatakrishnan, the Barclays chief executive, although he has publicly said in the past that ring-fencing is not a major financial headache for his bank.

Other industry executives have expressed scepticism about that stance given that ring-fencing’s origination was largely viewed as being an attempt to solve the conundrum posed by Barclays’ vast investment banking operations.

The introduction of ring-fencing forced UK-based lenders with a deposit base of at least £25bn to segregate their retail and investment banking arms, supposedly making them easier to manage in the event that one part of the business faced insolvency.

Banks spent billions of pounds designing and setting up their ring-fenced entities, with separate boards of directors appointed to each division.

More recently, the Treasury has moved to increase the deposit threshold from £25bn to £35bn, amid pressure from a number of faster-growing banks.

Sam Woods, the current chief executive of the main banking regulator, the Prudential Regulation Authority, was involved in formulating proposals published by the Sir John Vickers-led Independent Commission on Banking in 2011.

Legislation to establish ring-fencing was passed in the Financial Services Reform (Banking) Act 2013, and the regime came into effect in 2019.

In addition to ring-fencing, banks were forced to substantially increase the amount and quality of capital they held as a risk buffer, while they were also instructed to create so-called ‘living wills’ in the event that they ran into financial trouble.

The chancellor has repeatedly spoken of the need to regulate for growth rather than risk – a phrase the four banks hope will now persuade her to abandon ring-fencing.

Britain is the only major economy to have adopted such an approach to regulating its banking industry – a fact which the four bank chiefs say is now undermining UK competitiveness.

“Ring-fencing imposes significant and often overlooked costs on businesses, including SMEs, by exposing them to banking constraints not experienced by their international competitors, making it harder for them to scale and compete,” the letter said.

“Lending decisions and pricing are distorted as the considerable liquidity trapped inside the ring-fence can only be used for limited purposes.

“Corporate customers whose financial needs become more complex as they grow larger, more sophisticated, or engage in international trade, are adversely affected given the limits on services ring-fenced banks can provide.

“Removing ring-fencing would eliminate these cliff-edge effects and allow firms to obtain the full suite of products and services from a single bank, reducing administrative costs”.

In recent months, doubts have resurfaced about the commitment of Spanish banking giant Santander to its UK operations amid complaints about the costs of regulation and supervision.

The UK’s fifth-largest high street lender held tentative conversations about a sale to either Barclays or NatWest, although they did not progress to a formal stage.

HSBC, meanwhile, is particularly restless about the impact of ring-fencing on its business, given its sprawling international footprint.

“There has been a material decline in UK wholesale banking since ring-fencing was introduced, to the detriment of British businesses and the perception of the UK as an internationally orientated economy with a global financial centre,” the letter said.

“The regime causes capital inefficiencies and traps liquidity, preventing it from being deployed efficiently across Group entities.”

The four bosses called on Ms Reeves to use this summer’s Mansion House dinner – the City’s annual set-piece event – to deliver “a clear statement of intent…to abolish ring-fencing during this Parliament”.

Doing so, they argued, would “demonstrate the government’s determination to do what it takes to promote growth and send the strongest possible signal to investors of your commitment to the City and to strengthen the UK’s position as a leading international financial centre”.

Continue Reading

Business

Post Office to unveil £1.75bn banking deal with big British lenders

Published

on

By

Post Office to unveil £1.75bn banking deal with big British lenders

The Post Office will next week unveil a £1.75bn deal with dozens of banks which will allow their customers to continue using Britain’s biggest retail network.

Sky News has learnt the next Post Office banking framework will be launched next Wednesday, with an agreement that will deliver an additional £500m to the government-owned company.

Banking industry sources said on Friday the deal would be worth roughly £350m annually to the Post Office – an uplift from the existing £250m-a-year deal, which expires at the end of the year.

Money latest: ’14 million Britons on course for parking fine this year’

The sources added that in return for the additional payments, the Post Office would make a range of commitments to improving the service it provides to banks’ customers who use its branches.

Banks which participate in the arrangements include Barclays, HSBC, Lloyds Banking Group, NatWest Group and Santander UK.

Under the Banking Framework Agreement, the 30 banks and mutuals’ customers can access the Post Office’s 11,500 branches for a range of services, including depositing and withdrawing cash.

More on Post Office Scandal

The service is particularly valuable to those who still rely on physical cash after a decade in which well over 6,000 bank branches have been closed across Britain.

In 2023, more than £10bn worth of cash was withdrawn over the counter and £29bn in cash was deposited over the counter, the Post Office said last year.

Read more from Sky News:
Water regulation slammed by spending watchdog
Rate cut speculation lights up as economic outlook darkens

A new, longer-term deal with the banks comes at a critical time for the Post Office, which is trying to secure government funding to bolster the pay of thousands of sub-postmasters.

Reliant on an annual government subsidy, the reputation of the network’s previous management team was left in tatters by the Horizon IT scandal and the wrongful conviction of hundreds of sub-postmasters.

A Post Office spokesperson declined to comment ahead of next week’s announcement.

Continue Reading

Business

Trump trade war: How UK figures show his tariff argument doesn’t add up

Published

on

By

Trump trade war: How UK figures show his tariff argument doesn't add up

As Chancellor Rachel Reeves meets her counterpart, US Treasury secretary Scott Bessent to discuss an “economic agreement” between the two countries, the latest trade figures confirm three realities that ought to shape negotiations.

The first is that the US remains a vital customer for UK businesses, the largest single-nation export market for British goods and the third-largest import partner, critical to the UK automotive industry, already landed with a 25% tariff, and pharmaceuticals, which might yet be.

In 2024 the US was the UK’s largest export market for cars, worth £9bn to companies including Jaguar Land Rover, Bentley and Aston Martin, and accounting for more than 27% of UK automotive exports.

Little wonder the domestic industry fears a heavy and immediate impact on sales and jobs should tariffs remain.

Money latest: ’14 million Britons on course for parking fine this year’

Please use Chrome browser for a more accessible video player

Chancellor’s trade deal red lines explained

American car exports to the UK by contrast are worth just £1bn, which may explain why the chancellor may be willing to lower the current tariff of 10% to 2.5%.

For UK medicines and pharmaceutical producers meanwhile, the US was a more than £6bn market in 2024. Currently exempt from tariffs, while Mr Trump and his advisors think about how to treat an industry he has long-criticised for high prices, it remains vulnerable.

More on Tariffs

The second point is that the US is even more important for the services industry. British exports of consultancy, PR, financial and other professional services to America were worth £131bn last year.

That’s more than double the total value of the goods traded in the same direction, but mercifully services are much harder to hammer with the blunt tool of tariffs, though not immune from regulation and other “non-tariff barriers”.

Please use Chrome browser for a more accessible video player

How US ports are coping with tariffs

The third point is that, had Donald Trump stuck to his initial rationale for tariffs, UK exporters should not be facing a penny of extra cost for doing business with the US.

The president says he slapped blanket tariffs on every nation bar Russia to “rebalance” the US economy and reverse goods trade ‘deficits’ – in which the US imports more than it exports to a given country.

Read more: Could Trump tariffs tip the world into recession?

That heavily contested argument might apply to Mexico, Canada, China and many other manufacturing nations, but it does not meaningfully apply to Britain.

Figures from the Office for National Statistics show the US ran a small goods trade deficit with the UK in 2024 of £2.2bn, importing £59.3bn of goods against exports of £57.1bn.

Please use Chrome browser for a more accessible video player

IMF downgrades UK growth forecast

Add in services trade, in which the UK exports more than double what it imports from the US, and the UK’s surplus – and thus the US ‘deficit’ – swells to nearly £78bn.

That might be a problem were it not for the US’ own accounts of the goods and services trade with Britain, which it says actually show a $15bn (£11.8bn) surplus with the UK.

You might think that they cannot both be right, but the ONS disagrees. The disparity is caused by the way the US Bureau of Economic Analysis accounts for services, as well as a range of statistical assumptions.

Read more from Sky News:
Water regulation slammed by spending watchdog
Rate cut speculation lights up as economic outlook darkens

“The presence of trade asymmetries does not indicate that either country is inaccurate in their estimation,” the ONS said.

That might be encouraging had Mr Trump not ignored his own arguments and landed the UK, like everyone else in the world, with a blanket 10% tariff on all goods.

Trade agreements are notoriously complex, protracted affairs, which helps explain why after nine years of trying the UK still has not got one with the US, and the Brexit deal it did with the EU against a self-imposed deadline has been proved highly disadvantageous.

Continue Reading

Trending