What caught my eye this week.
The first few days of a new year are often an anti-climax. It turns out the problems we had last year aren’t magically wiped away by how human beings decide to formally turn a page.
However this time there’s déjà vu in the mix too. Because early 2025 has a distinct end of 2022 vibe.
Yes, bonds are selling off – and people are writing mean things about central banks and a UK chancellor again.
In fact, earlier in the week it was being framed with straight-up Truss-talk – another UK gilt crisis.
It’s true the UK is somewhat uniquely placed for bullying, being so enfeebled.
But rising yields are global, even if pundits in every country have tried to spin the rise in borrowing costs as their nation’s own special curse.
Here we’re blaming Rachel Reeves’ tax-raising and spending budget.
In the US people point to incoming Trump tariffs and a government deficit in the trillions continuing to add to its planet-sized national debt – as well as a growing conviction that inflation isn’t quite licked.
But yields are up in Europe too – in the EU and outside of it.
For example in Romania – where the ten-year yield is nearing 8% – I suppose they’re blaming their own barmy strongman [1] moment.
It’s different this time
As often happens with bonds, trouble was brewing for months before it landed on the front pages.
Financial nerds (guilty) were especially worried by the unusual development illustrated in this graph:
As Torsten Slok at Apollo [2] wrote when he posted it:
The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting.
By the end of the week – when the US posted a surprising high ‘jobs number’ that showed the economy was firing on most cylinders – the consensus was that the ‘terminal rate’ was going to end up higher, and that this was what the clever market had already discounted.
Terminal bore
The ‘terminal rate’ is just bond-wonk talk for where they expect rates to end up for the five minutes when everything is in balance, before the next crisis strikes and central banks have to act again.
Six months ago everyone was looking forward to multiple rate cuts from the US Fed. And many were still wondering where the long-promised recession had gone.
So yields seemed dead set to fall.
But looking at markets now, I’d be surprised if even the one Fed cut still expected comes to pass this year.
Of course, saying “yields are up because the terminal rate is higher” really just palms off the question of “why?”
As does another bit of bond jargon that I think is relevant – the ‘term premium’.
This term premium is basically the extra return you’d expect and demand for buying long-dated bonds instead of short-term bonds.
But without getting into the weeds – and knowing full well that some readers will confidently declare they know exactly what it is in our comments – let’s just say the term premium is a bit controversial.
That’s because it involves estimates of risk, not simple maths. (Some people even deny it exists!)
It’s a mad-a world
The sober way to assess the graph above is to say that the US economy is much stronger than was expected, inflation has been largely dealt with but is still over-target for the usual laundry list of reasons, and that Trump will cut taxes, boost growth, and continue to add to the US national debt.
However I’m minded to agree with economist Paul Krugman, who speculates there may now be “an insanity premium on interest rates”.
Krugman writes [3]:
Look at the dynamic over the past few days.
Jeff Stein of the Washington Post reported that people around Trump were planning a fairly limited, strategic set of tariffs rather than the destructive trade war against everyone Trump has been promising; Trump quickly responded with a Truth Social post calling the report “Fake News” and declaring that he does too intend to impose high tariffs on everyone and everything.
In short, Sources: “Trump isn’t as crazy as he looks.” Trump: “Yes I am!”
Then, as if to dispel any lingering suspicions that he might be saner than he appears, Trump held a press conference in which he appeared to call for annexing Canada, possibly invading Greenland, seizing the Panama Canal and renaming the Gulf of Mexico the Gulf of America.
This morning CNN reported that Trump is considering declaring a national economic emergency — in a nation with low unemployment and inflation! — to justify a huge rise in tariffs.
Like any economist Krugman has been wrong about plenty of things, but I think he’s on the money here.
I’d even argue there’s some kind of Stockholm Syndrome thing going on in US politics at the moment, which has reached across the pond to us too.
A man who early last year was found guilty on 34 counts of falsifying business records to disguise hush money payments to a porn star has been re-elected as President for a second term.
You may recall the headlines:
[4]
Trump is the first ex-president to be sentenced for criminal conviction.
Yet this week he wasn’t given anything for his crimes – basically because [5] he’s about to be a President again and nobody wants a fuss.
No fuss, like, say, that we saw four years ago when his followers run rampant through one of the US government’s most important buildings and multiple people died:
[6]
If you think this is all normal then good luck to you.
Indeed even if you’re one of his Poundshop fans stirring up trouble on social media this week – someone whose knowledge of history doesn’t seem to extend beyond The Battle of Britain – then you have to admit that for good or ill, things seem to be ‘in play’.
Just since Krugman’s recap we’ve had the MAGA wing blaming the L.A. fires on excess wokeism. As opposed to, say, last year being the hottest globally since records began due to human-induced climate change.
And now I read Peter Thiel opining in the FT [7] and calling for a Truth and Reconciliation process in which US state secrets are declassified by Trump to the world because “the Internet won”.
Meanwhile Trump’s best-buddy and backer Elon Musk is getting stuck into politics here, in Germany, and elsewhere. And the same faction of Tories who clutched their pearls when Obama suggested Brexit didn’t make a whole lot of sense eagerly leapt up with their tails wagging and teeth drooling when this foreign master called.
You can obviously see my biases here – but it is all relevant for the bond market.
In the first Trump presidency we saw yields roiled by his random Tweets. Such uncertainty has a cost.
In short, bond holders want more of a return when they’re hostage to a self-proclaimed revolution, and I am pretty sure that’s reflected in the escalating term premium
Back in basket-case Britain
US bonds matter because they act like gravity on yields around the world.
If you can get 5% on 20-year US Treasuries – which you now can – then it’s harder to justify owning say European government debt on lower yields, let alone that of an emerging-emerging market like the UK.
The UK 30-year gilt yield is now 5.4% – up from a yield of 5.1% when we sang Auld Lang Syne and just 4.3% back in September.
That’s a huge move.
Mostly this reflects rising yields across global bonds, but the UK does seem to be getting it a bit worse.
Sure, the Budget [8] won’t have helped. I didn’t like Labour’s anti-growth tax on business either.
True, blaming the new Labour government for coming clean on the mess left by the previous 10-plus years of unavoidable events – Covid, Ukraine – and witless self-harm – the ongoing cost of Brexit, which more or less covers the spending gap Reeves is trying to fill – seems to me like chastising the parents who are cleaning up a ruined house after a teenage party goes viral on Facebook.
But that’s democracy. He or she who who’d wear the crown must drink from the poisoned chalice.
And on that note – not incidentally – we have Nigel Farage and Reform waiting in the wings and polling a 20% share of the popular vote.
When you consider the best that can be said about Brexit is house prices didn’t immediately crash – but absolutely nothing good came of it, not even the all-important fall in immigration – then you can see the problem.
As in the US, some people are still voting with their hearts and feelings, not their heads.
In such a climate anything can happen. And with UK government borrowing now looking like rising and becoming more costly to service even with grown-ups in charge, I can well understand why a bond holder would want more return for holding a 20-year bond baby.
(Bigger picture: how’s your bug-out emergency plan coming along?)
Inflated expectations
With all that out my system, let’s also admit higher yields are about inflation expectations, as I said.
True, this is undoubtedly linked to politics too. The timing in Torsten’s graph above makes that clear. Non-token tariffs and mega-deportations would cost the US economy, and hurt the rest of us too.
But just on the numbers, inflation hasn’t yet returned to target in the US and most other places, and the big US jobs number won’t have settled any nerves.
Personally I don’t understand the surprise.
Just 18 months ago, confident sages were telling us we’d need a recession and soaring unemployment to bring down the double-digit inflation.
In fact we needed neither – probably because double-digit inflation was yet another hangover from the pandemic, more than anything normally cyclical – but I’m not surprised it’s lingering on above 3%.
I was warning here as far back as 2020 that the aftershocks from global lockdowns would reverberate for years, like a cranky old machine you turn off and restart. It was never going to be a painless reboot.
But how much does a little bit of ongoing inflation really matter, anyway?
Inflation targets are arbitrary, and while it would do more damage to abandon them here, the Fed and other Central Banks can probably quietly ignore them if they believe inflation will still eventually settle, if they’d rather keep the economy humming. Especially when inflation expectations seem anchored, and in the main the big demands for huge pay increases have gone away, at least outside of the public sector.
Alas, the trouble, as I’ve belaboured above, is that political and fiscal events are rocking that quiet agenda.
The bond scare and you
So what does this all mean for our personal finances?
Well, mortgages probably aren’t going to get cheaper [9] anytime soon.
Even if the UK does go back into recession, the Bank of England can’t really cut much against wider rising yields. Besides, it’s that market rate environment that really sets mortgage rates.
Higher government borrowing costs could well mean more taxes, too. Goodness knows from where.
And/or spending cuts – but ditto.
On a brighter note savings rates should stiffen a bit. Good news for those with a stash of cash.
The 60/40 sitrep
Another thing worth mentioning is that bond portfolios won’t be feeling anything like as much pain as in 2022.
Yes you’ll probably be looking at capital losses rather than the gains that seemed likely a year ago. But check out this five-year graph:
[10]
Source: Google Finance [11]
The recent declines in iShares’ core long-term bond ETFs are not pretty, but they’re nothing on the scale of what we saw in 2022.
As I’ve stressed a few times over the past couple of years, the dramatic re-rating of bonds [12] from the near-zero era was a one-time massacre that shouldn’t put you off the asset class for life.
If your preferred asset allocation wants them in your portfolio, then you needn’t overly-fear a repeat of 2022. Or at least if we saw another 2022 in a hurry then we’d have problems that would roil everything else in your portfolio except perhaps for gold and tins of beans.
Finally, I presume those of you who believe that holding individual long bonds would somehow have saved you from the murderous maths of the 2022 bond sell-off will finally listen to me when I say that it wouldn’t have.
Here’s how the Treasury 4.5% 2042 gilt has behaved over the past three months, for instance:
[13]
Source: Hargreaves Lansdown [14]
And here’s the five-year chart:
[15]
Source: Hargreaves Lansdown [14]
As the second chart shows, own expensive bonds trading above-par and you’ll get whacked when yields rise, whether you hold the bonds individually or in an ETF that makes the job easier for you.
There are other reasons you might prefer to own individual bonds. But I see so much confusion in the comments about it that I think it needs its own article. For now know that reducing duration [16] is the only way to prevent this kind of short-term volatility (typically at the cost of long-term returns).
The bond news signal
I’ll leave you with a hopeful thought.
Normally when ever-boring bonds make headlines around the world, we’re near or even past the peak of things getting worse.
So I imagine yields will steady from here. At least for a while.
Have a great weekend!
From Monevator
The Slow and Steady passive portfolio update: Q4 2024 – Monevator [17]
Pensions and inheritance tax: Rugged by Reeves – Monevator [18]
From the archive-ator: Three crucial steps to making New Year’s Resolutions work – Monevator [19]
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
US jobs market soars past expectations in last report before Trump – Guardian [20]
Britain’s gas storage levels ‘concerningly low’ after cold snap – Sky [21]
Tesco faces £250m in extra costs after Budget tax shake-up – This Is Money [22]
Lloyds to let customers use Halifax and BoS branches – BBC [23]
Man told he can’t recover £598m of Bitcoin from Welsh tip – BBC [24]
Hard-boiled egg becomes healthy on-the-go hit for shoppers – Guardian [25]
“My mum died after four days on an A&E trolley” – BBC [26]
[27]
Which celebrities popularised (or tarnished) baby names? – Stat Significant [28]
Products and services
Chip launches best buy easy-access savings account, bucking trend – T.I.M. [29]
How to get cashback on train tickets – Be Clever With Your Cash [30]
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley [31]. Terms apply – Charles Stanley [31]
Your new year pension tidy up could drag on until spring [Search result] – FT [32]
Where are interest rates headed and what will it mean for mortgages? – T.I.M. [33]
Open an account with low-cost platform InvestEngine via our link [34] and get up to £100 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine [34]
Is the Monzo 1p savings challenge worth trying? – Which [35]
The best heated clothes airers to save money when drying laundry – Guardian [36]
Homes for sale for fitness fanatics, in pictures – Guardian [37]
Comment and opinion
Pot Kettle Black: active funds and index concentration – Morningstar [38]
Why fears over IHT raid on pensions may be ‘overcooked’ – This Is Money [39]
Ten reasons you’re not stupid for paying off debt – White Coat Investor [40]
Risk is personal – Humble Dollar [41]
How much money buys you happiness in retirement? [Search result] – FT [42]
Why Michael Green is known as the Cassandra of passive investing – I.I. [43]
You don’t need to budget [Podcast] – Money With Katie via Apple [44]
Situational spending – Seth Godin [45]
How to split your finances in a divorce – Which [46]
About to retire? Here’s a must-do checklist – This Is Money [47]
Lessons learned from The Purpose Code [48] – Oblivious Investor [49]
A look back at 2024 – Simple Living in Somerset [50]
US markets are whack: 2025 edition
The US stock market has never been more concentrated – FT [51]
Howard Marks on bubble watch – Oaktree Capital [52]
Stocks are more expensive than they used to be – The Irrelevant Investor [53]
Are we bullish enough? (Redux) – Of Dollars and Data [54]
The Roaring 2020s – A Wealth of Common Sense [55]
US credit markets suggest US stocks are overvalued – Bloomberg via Y.F. [56]
2024 portfolio reviews mini-special
One from a mostly passive high net worth investor… – Fire V London [57]
…and one from an unapologetic small-cap stockpicker – Maynard Paton [58]
…and a dividend focused portfolio – UK Dividend Stocks [59]
Naughty corner: Active antics
Meb Faber: shareholder yield 2nd Edition [Free audio book] – Spotify [60]
The business of selling booze is under pressure – Sherwood [61]
2035: an allocator looks back over the last ten years [Note: 20 thirty 5] – AQR [62]
Simple formulaic investing still works – Alpha Architect [63]
Risk management 2025-style – Known Uknowns [64]
MicroStrategy starts the year buying more bitcoin… – Sherwood [65]
…but why is the corporate HODL-er in such a hurry? – FT [66]
Kindle book bargains
The Black Swan by Nassim Taleb – £0.99 on Kindle [67]
The Simple Path to Wealth by J.C. Collins – £0.99 on Kindle [68]
Number Go Up: Inside Crypto… by Zeke Faux – £0.99 on Kindle [69]
Side Hustle by Chris Guillebeau – £0.99 on Kindle [70]
Environmental factors
Richest use up their fair share of 2025 carbon budget in ten days – Guardian [71]
Hottest year on record for the planet in 2024 – Guardian [72]
Is climate change to blame for the California wildfires? – A.P. via Euronews [73]
Wind was Britain’s top electricity source last year… – Reuters [74]
…and the UK’s EV charging network saw record growth… – This Is Money [75]
…indeed, EV sales are up around the world – Semafor [76]
Robot overlord roundup
On roads teeming with robotaxis, street crossings can be harrowing – W.P. via MSN [77]
US misrule mini-special
The slow assassination of the free press – How Things Work [78]
January 6 was successful – Unpopular Front [79]
The truth about January 6… – Kottke [80]
…and what really happened with the first police officer suicide – Politico [81]
Meta’s free speech grift [Or: if you can’t beat ’em join ’em] – Kottke [82]
$1m knee pads – Spyglass [83]
Understanding DOGE as procurement capture – Anil Dash [84]
Off our beat
Against optimisation – The Garden of Forking Paths [85]
Why we struggle – Humble Dollar [86]
The extreme self-care trends shaping young men – Men’s Health [87]
144 ways the world got better in 2024 – Reasons to be Cheerful [88]
Why Germans don’t do it better [Podcast] – A Long Time in Finance [89]
Coffee drinkers reap a health boost, provided they drink it in the morning – Guardian [90]
And finally…
“How much money you made or lost on your last investments can transform how risky you think the next one is. The same bet can feel either dangerous or safe, depending on whether you are on a hot streak or in a slump. That’s how your investing brain is designed.”
– Jason Zweig, Your Money and Your Brain [91]
Like these links? Subscribe [92] to get them every Friday. Note this article includes affiliate links, such as from Amazon [93] and Interactive Investor [94].