The Times They Are A-Changin’: “Yield, or thou diest”

 

 

“Every day, several times a day, a thought comes over me. I owe more debts than I ever can pay back more money than I’ll ever see”

 

Recently, there has been much focus on government bond yields, the sustainability of government debts and bond vigilantes versus governments, etc..

 

Rising yields are an issue for the majority of developed economies, however, we will focus on three:

 

1. UK (Gilts); 10-year gilt yields are at their highest levels since 2007, with the 30-year gilt yields at their highest since 1998.

2. US (Treasuries); Both10 and 30-year yields are at their highest levels since 2002

3. France (10-year OAT); trading at their highest levels in over 20-yrs

 

Fitch Ratings and the IMF, show that benchmark 10-year government bond yields across the largest developed economies have increased by an average >1% since early 2026.

Key drivers include a geopolitical oil price shock, stubborn inflation, heavy government deficits, and massive corporate debt issuance linked to the AI infrastructure boom, and ageing demographics in developed economies resulting in rising pension costs.

Research by the OBR shows that the UK allocates C.11.3% of its total public expenditure to pensions, a number that pales into insignificance when compared to France, who spends C.25% of its total government budget on pensions.

As a result, France’s national debt is approaching 120% of GDP, which is becoming fiscally unsustainable.

This deficit is largely the result of an aging population which is causing pension costs to grow faster than revenue.

 

‘oil price shock, stubborn inflation, heavy government deficits, and massive corporate debt issuance linked to the AI infrastructure boom, and ageing demographics in developed economies resulting in rising pension costs’

 

This is exacerbated by their refusal to be realistic about retirement. There are proposals for their statutory retirement age to change from 62 to 64 under the 2023 French pension reform law. However, due to opposition from extremist parties on both the right and left, the change has been frozen until after next year’s election.

Even if the statutory retirement age changes, it will still represent one of the lowest among the world’s advanced economies. Across the EU and the broader OECD, the standard is closer to 65, with many major economies already at 66 or 67.

Clearly, the current course is unsustainable, especially given that French life expectancy at age 65 is about 87 years of age, 2 years longer than in the US.

The student unrest of recent weeks was caused by restrictions on education spending to fund already overly generous pensions. The net effect is the state handing over large subsidies to older people at the expense of everyone else.

The issue as become a political football, with extremists such as Marine Le Pen, pledging to roll the retirement age back to 62. Cost aside, this is symptomatic of a the unwillingness of France’s rising right to face reality.

Opposing Le Pen, is the hard-left, Jean-Luc Mélenchon, leader of La France Insoumise. His proposal revolves around €600 billion (18% of the outstanding government debt) of government bonds that France’s central bank owns and will hold to maturity, at which point taxpayers will have to pay more taxes, or borrow more, to repay their own central bank.

Mélenchon, not unreasonably, see this as absurd; one side of the French state borrowing €600 billion to pay another. His alternative is a debt swap between the Treasury and the central bank that, in practice, retires that debt to create fiscal space for new investment.

This is similar to the proposal put forward in 2015 by Yanis Varoufakis, when he Greece’s finance minister.

This inability to agree on credible, deliverable fiscal measures, limits what both the ECB and EU can do with their stability mechanisms.

Has France has moved on from too big to fail to being too big to save?

 

‘Has France has moved on from too big to fail to being too big to save?’

 

A fiscal crisis in France, the EU’s second largest economy, presents a looming fiscal crisis will distract and delay Europe’s shift towards “strategic unity.”

With the US becoming an unreliable partner, Europe needs to establish a “collective independence” across defence, energy, trade and supply chains.

In geopolitical terms, the threat posed by Europe’s right-wing populist political parties and their links to Putin, together with their Anti-EU rhetoric highlights the risks of Europe splintering rather than become more unified.

In the US much of the problem is self-inflicted.

Trump’s war in Iran has led to inflation. His “big, beautiful” tax cuts for the rich have increased an already unsustainable national debt. And, the overall tenet of the administration, its attitudes to former-allies, treaties, and embrace of Russia have all dented investor confidence.

There has been a focus on the deficit and new debt issuance, but there is also the larger issue of maturing debt that has to be rolled over. In uncertain times, it cannot be assumed that bondholders will simply reinvest.

There is also competition for funds from corporates, especially those in AI.

Estimates for net new bond issuance for 2026-2027, are C.$2.1trn for federal government and $1.4trn for corporates.

In both cases this excludes maturing debt. Taking corporate issuers, estimates suggest they will have $2.0trn of refinancings, in addition to the $1.4 trillion of net new debt.

 

‘In the US much of the problem is self-inflicted’

 

Much of this debt is for datacentres which, research suggests, could be sunk-costs:

 

• The Stanford economist Hanno Lustig estimates that for the owners of datacentres to break even on their investments in AI – estimated to reach $1.43tn this year – their revenue would have to grow by 45% on average every year for the next seven years. By 2032, it would amount to roughly 9.2% of GDP.
• Jared Bernstein, former chair of Joe Biden’s Council of Economic Advisers, and Stanford economist Ryan Cummings, concluded that the nation’s six superscalers – Google, Meta, Microsoft, Oracle, SpaceX and Amazon – would need additional revenues of $13.1tn to $18.7tn over the next 10 years just to pay for their massive investments in AI. Roughly the same as their total revenues over the last 10 years.

 

We finish by considering the UK, where steady as she goes might be the summary.

Silvana Tenreyro, the IMF’s economic counsellor, says chancellor Healey should “stay the course” and continue repairing the UK’s public finances.

 

‘the UK “stands out” among G7 countries in having a plan to narrow its deficit’

 

Tenreyro said the UK “stands out” among G7 countries in having a plan to narrow its deficit.

The IMF predicted GDP growth of 1.3% for the UK this year, up 0.3% from its July update.

The inflation picture isn’t so rosy, with the IMF expecting our average inflation to be 3.3% this year and to remain at 2.8% in 2027 – a challenge for Healey and the PM as they strive to fulfil promises to offer a “breathing space” from rising costs.

And, we all know whose fault that is!

 

 

“I don’t owe you anything, no But you owe me something Repay me now”

 

Today, we have a brief look at debt markets and government debt.

In the UK, debt markets are often viewed as a brake on politicians’ wilder ambitions, for example, Truss’s unfunded tax giveaway to the already rich.

Another view is that the so-called “bond vigilantes” stop governments from doing what is needed. This reflects the frustration expressed by the then PM-in-waiting, Andy Burnham, who regarded them as inhibiting the spending needed to reflate the country.

Ultimately, the providers of government debt are investors who don’t wish to lose their money on feckless leaders’ vanities.

The US is essentially in chaos, governed by a narcissist who is taking everyone down with him. The only difference is that he will be laughing all the way to the bank, whilst the majority queue at the food bank.

In France, we have what is shaping-up to the classic battle of young versus old, the past versus the future.

Their refusal to accept the limitations of state pension provision is seeing the old subsidised by everyone else.

The political divide reflects this. On the left, Mélenchon is proposing policies aimed at the young, whilst on the right Le Pen is playing to the grey market.

All of which leaves the UK looking like the pinnacle of sanity and restraint.

I have said it before: Burnham looks to be a lucky leader.

Yes, he has a first budget to navigate, and one that will be anything but exciting or revolutionary. Instead,  it steady as she goes. There will be some small crumbs of comfort for those bearing the brunt of the cost-of-living crisis, but little else.

Now isn’t the time to be upsetting nervous debt markets, and raising taxes is constrained by manifesto promises. Which leaves……nothing!     

Lyrically, we start with “The Debt I Owe” by Woody Guthrie, which was edited and had additional words from Lou Reed. We return to the UK as we end with “I Don’t Owe You Anything” by The Smiths.

Enjoy!

Philip.

 

@coldwarsteve

 

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

Click on the link to see all Brexit Bulletins: