Politicians on all sides of the English Channel are about to be tested on the first rule of the bond market: a rough and tumble between borrowing a lot of money in a swimsuit and borrowing a lot of money in a clown costume and brandishing a supersized aqua pistol. There is a difference. The last one is a good suggestion.
Stability in sterling and gilt prices ahead of the United Kingdom election means traders are confident Rachel Reeves understands the remarkable difference. The bet at present is that, as opinion polls suggest, England’s former Lockyer economist becomes Chancellor from July 5 and if, further spoiling the series, she decides to raise bond issuance targets, So the markets will settle down very well. Borrowing costs will probably rise, but in all likelihood it will not be catastrophic.
On France, traders are less convinced. French government relations have been strained since President Emmanuel Macron called snap legislative elections, the first round of which will be held on Sunday. Capital treasury managers know that by July 8, the country will have a chief minister from the far left or, as surveys suggest, most likely, from the far right. As UBS notes, a second round of alliance between those two extremes, which would have no purpose for Macron’s celebration, would be the least market-friendly end result. The storage facility says discussions with buyers suggest the gap between French and safer benchmark German government bonds “could test 1990s levels in this scenario”.
The looming threat to both countries’ funds is Liz Truss, whose attack on UK markets in 2022 with her Chancellor Kwasi Kwarteng remains as a textbook case of what not to do. “People say we’ve seen a Liz Truss moment and no one wants a Liz Truss moment, but the market knows it could happen,” said Rob Dishner, senior portfolio supervisor at Neuberger Berman. “Any plan will require fiscal sense otherwise markets will be quick to punish them.”
With this in mind, how does the wise ancient government avoid pushing casual markets to the brink? The first step to Kwarteng being exceptionally profitable is to be lucky. For those who squint, drink wine, and get up in your head for a few moments, you can imagine the huge decline their efforts have caused bond prices, and the wobble they have caused. The fact is driven to an obvious door. (For what it’s worth, my worker Gillian Tate described that train of thought the other day as “bollocks”, and I agree with her that it’s true.)
Step two is to use an external, independent framework to examine your sums – a level that Kwarteng and Truss rejected, leaving it to seek the input of the Administrative Center for Finance Accountability. And Step 3 is to maintain a certain degree of respect for the markets, limits on how far they can be driven and figuring out what can go wrong in the event of a short-circuit.
The important thing is that borrowing is not a disease in itself. What is more notable for investors is how any borrowing is made, how it is offered and what it is used for. “We can have a more sensible debate around debt levels – no matter where the spending goes,” said Tristan Hanson, treasury supervisor at M&G Investments.
One encouraging sign is that Marine Le Pen’s Rassemblement Nationwide has addressed the blackmail of self-immolation in the Truce market. Jean-Philippe Tanguy, an RN MP who works on fiscal policy, told the FT that he is telling companies and investors that the party will “hold the line on the deficit and present a credible plan”. Crucially, he said, “the market will be critical of us, so we really have no choice but to do this”.
Apart from any objections to RN’s broader timetable, analysts are taking it as a sign that the party is willing to melt down the confines of coverage objectives to move in the right direction. “We believe the RN will present a moderate front while in government to show the French people that the RN can govern as well, if not better, than mainstream political parties,” Nomura analysts wrote in a note. ” “In our view, a willingness to behave like adults when discussing with businesses and market participants will go a long way to allaying fears.” The prospect of a prolonged dispute with Brussels is wasteful, and sets France up to resemble ancient Italy – risking bouts of bond contagion due to funding disruptions. However, the RN’s retreat from its eagerness to leave the EU is undoubtedly helping.
Overall, the coming stir of the European independence movement provides more reason for investors to worry about France than the United Kingdom. For one thing, the outcome of the French vote remains highly uncertain. Moreover, the country has a far larger share of debt maturing over the past five years than the United Kingdom, Dishner calculated, meaning it will feel the heat from potentially higher borrowing rates than previously expected. In addition, a large portion of the French government’s debt is held in another country – a large number to keep the country from panicking, he says.
The notion that borrowing is impossible is a wrong conclusion to draw from the 2022 experience. However, political powers want to reveal the potential that helps keep markets on edge, and want to avoid big shoes and multicolored overalls in their wardrobes.
katie.martin@feet.com