‘I used to think that, if there was re-incarnation, I wanted to come back as the President or the Pope … but now I would want to come back as the bond market. You can intimidate everybody.'
James Carville (political adviser to Bill Clinton)
It’s just over one year since we last led with this quote from James Carville; financial markets definitely have a seasonal rhythm, and early autumn is a particularly challenging time for the bond markets. Other market features which particularly stand out are for equities — ‘sell in May and go away’ — and the run-up to Christmas and the new year, as a large number of investment funds move cash balances into equities to keep their investor audiences content.
There is, however, a very menacing convergence of public bond markets in autumn 2026 for a wide variety of reasons, and this is affecting many of the leading ‘free world’ economies, including Japan, the United States and the UK. Much has to do with the shortcomings of democracy, on which we commented last week, but geopolitical tensions, demographics and Trump’s failure to dominate the economies of both the U.S. and the world have a lot to answer for.
But reliance on public debt as the last resort all started several decades ago; in particular, the abolition of single capacity in financial markets has a lot to answer for. This defined the separation of the roles of principal and agent: for the former, your sole interest is in your own trading, whereas for the latter, your whole focus is in the interests of your client or customer. The combination has proved difficult, to say the least.
Andy Burnham tracks the UK’s economic problems back to the same era (the mid-1980s), but his reference is to the privatisation of utility companies. There have indeed been local difficulties from these, particularly in the water industry, but the introduction of dual capacity had much more to answer for in terms of the explosion in public debt over the past forty years.
The immediate aftermath of the introduction of dual capacity was, however, very buoyant. A burst of activity flew out of the financial institutions, with only a familiar sterling crisis in the early 1990s and the ‘dotcom boom and bust’ standing in the way of market optimism.
However, the inability of financial institutions and their boards to cope with conflicts of interest all came home to roost in 2008 when the financial crisis struck. Gordon Brown was the UK Prime Minister then and, in the United States, Barack Obama was being elected to succeed George W Bush.
Massive speculation on property values by both homeowners and financial institutions, together with a thoroughly irresponsible approach to derivatives-backed debt funding resulted in major bankruptcies, including that of Lehman Brothers. The International Monetary Fund estimates that large U.S. and European banks lost more than $1 trillion between January 2007 and September 2009.
Governments saw no alternative but to step in, in order to avoid a 1930s-style meltdown. Not only was public debt used extensively to bail out the stricken financial institutions, but it also resulted in a major change of focus — so that public money started to be seen as a bottomless reserve for woes of all kinds.
This required massive reliance on Government bonds; but, with the combination of recession as a result of the financial crash together with the impact of tech demonetization driving the money supply into near-deflation, central banks started buying those newly-issued Government bonds in large numbers. These central bank purchases masked the deteriorating prospects for the economy and, when the pandemic arrived, this was driven still further in the United Kingdom by an immediate resort to public money in order to fund the furlough scheme. This added a further £400 billion to the public debt burden.
Then, once the Bank of England realised that it couldn't go on buying Government debt and pushing still more money into the economy as inflation started to rear its head, it discovered that the original private-sector buyers of that debt — in particular, defined benefit pension schemes — were no longer there. They had been replaced by defined contribution pension schemes, which are invested mainly in equity markets.
So, there is a litany of woes which have gathered pace in order to deliver such a heavy current strain on the bond markets; and now, all that has been crowned with Trump's erratic handling of global economics together with demographics which are so strongly geared to spending on old people at the expense of the young. It's easy to see how so much of this mess has been caused by discounting the future in order to resolve current issues.
In retrospect, it all demonstrates the short-termism and opportunism which infests modern democracy, together with a real absence of strategic thinking. That strategy, however, has to be well-founded; the irony is that the abolition of single capacity in the 1980s, which was supposed to be strategic in character, suffered a real under-estimate of human weakness to resist the temptation to go for immediate gold. This should have been subject to a strong regulatory environment, but it was not.
Where does all this leave us? It would require a massive spate of inflation to devalue all that debt and, in any case, nearly 25% of UK Government debt (£619 billion) is index-linked, compared with just 7% in the United States. What we really need is a complete sea-change in moving away from treating public finance as a bottomless reserve. It will take years to achieve, but we really need to re-establish the mindset of the 1960s — don't look to Government for all the monetary answers, just for good regulation. This clearly didn’t accompany the introduction of dual capacity in financial markets.
Gavin Oldham OBE
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