Inverted Yield: The Grim Reaper Of Economics

Fear not. This isn't going to be a long boring article on economic theory and you don't need to be a mathematician: it's common sense. It's simple to understand and easy to grasp, and won't use unintelligible terminology. We just need to get a simple principle: money which is lent for a short time doesn't make much back in interest; money lent for a long time does.

Naturally, you'd expect to earn more interest if you're willing to lock up your money for 10 years versus just 3 months, right? This makes intuitive sense. Longer commitments should come with higher rewards to compensate for the extra risk and time.

Breathe in. This is going to be fine.

This creates an upward-sloping curve when you plot profit over time. Short-term rates sit low on the left, and long-term rates climb higher as you move right across the chart. More time equals more interest paid back to you on the money lent out.

When we say "the 10-year Treasury rate is 5%," it means the government pays 5% to borrow money, while investors earn 5% to lend money. It's the same rate, but experienced differently depending on which side of it you're on.

The borrower – i.e. the government – might pay 3% to borrow money for six months, but 6% to borrow for ten years. This makes perfect sense from their viewpoint because they're asking investors to take on more risk and uncertainty for longer periods.

Money and time are linked. They come as a package like day and night.

For the lender – investors buying government IOU notes –, short-term lending provides less profit while long-term lending provides higher profits. You might earn 3% on a six-month IOU but 6% on a ten-year IOU. This compensates you for tying up your money longer and accepting more risk.

The same rules apply to the government as they do to your family credit card. You borrow when you can, not when you need to. You borrow when it's cheap, not when it's expensive. You get the lowest rate you can on your mortgage, and you don't take out short-term payday loans or go shopping on expensive credit cards. And you absolutely never pay your credit card debts by taking out more loans. This is why it's important your Chancellor is good with money, and not a career housewife politician who has never had a real job, has lied about the job they supposedly had, and has never run a business.

What Are Gilts, Anyway?

After the 1688 Glorious Revolution and founding of the Bank of England by Royal Charter in 1694, King William III borrowed £1.2M from the bank's 1,268 private stockholders to fund a war with France. That's how governments started borrowing money from private citizens, who traded on it.

A bond (or "gilt" as we call them in the YooKay), is a paper IOU note printed by a government. It's less of "I owe you," and more like "taxpayers, who we will throw in jail for not donating us free money from their salary, will owe you..." They do it to borrow money on private markets, and traders sell them between each other. When you buy a 10-year gilt, you're essentially betting the YooKay government will still exist in ten years and will still have the ability and willingness to steal enough tax from ordinary people to pay you back with interest. They're betting on the government's future ability to manage the economy.

For all intents and purposes, a "gilt" is an old English word for "bond." A promise, an IOU, etc. The bank notes in your wallet are "promissory debt notes" which say "I promise to pay the bearer on demand the sum of…” and they are backed up by... wait for it... the YooKay government’s ability to tax people.

• The % rate you buy at is fixed and called the "coupon."
• When someone else buys one later, with a bigger %, you are making less than they are. Yours is worth less now.
• If you want to sell it, you have to drop the price.
• The person who buys then it from you is getting what you bought at a lower price, so they're actually making more than you did originally. The lower they get it for, the more they squeeze out of it, or the "yield."

Example:

• You buy a magic IOU promise for £100 which pays a fixed £4 a year which can't change (4% yield).
• Later, new magic IOU promises come out paying £5 a year, which are better than yours.
• To sell yours, you must drop the price, say to £80 or £90.
• If someone pays only £90 for your magic IOU promise – still paying £4 a year –, the they're getting more like 4.4% (because they’re earning £4 on something they paid less than you bought it for).
• The lower the price, the higher the yield. Or, the less the cost, the more productive the squeeze.
• So, price moves in the opposite direction to yield. The lower the price you pay for the same thing, the more you make on the difference.
• When rates for magic IOU notes in the market go up, your old magic IOU note is worth less, so its price falls. The yield the next guy gets from it rises, because they pay less for it than you did.

Bonds and gilts are all about what something will be worth in the future, but they're also about what someone bought them for in the past. What you want is a nice big yield you can get a good squeeze out of.

The dream setup is:

• a high % rate;
• bought at a low price;
• with a long time left.

You want to buy bonds when:

• The government issued them at high rates - so the coupon payments are fat
• But you're buying them at a discount - so you pay less than face value

This gives you the best of both worlds: high fixed payments coming in, but you paid a low price to get them.

Let's try some analogies.

Imagine you own a bridge that drivers pay to cross - it generates a steady £5,000 per year forever. You paid £100,000 for this right. But then the government builds competing bridges nearby, making yours less valuable. If you want to sell, you might only get £80,000. The new owner still collects the same £5,000 annually, but since they paid less for the privilege, they're earning a higher percentage return on their investment.

You buy a house for £100,000 which rents for £400/month (4% yearly return). Later, new houses come on the market renting for £500/month. Your house is now less attractive, so to sell it, you'd have to drop the price to maybe £80,000. The buyer still gets £400/month rent, but on their £80,000 investment - that's a 6% return. They get a better "yield" because they paid less.

You buy the rights to a song's royalties for £50,000 - it pays you £2,500 every year. Later, when newer songs are generating higher royalty rates, your old song rights become less attractive. You can only sell for £40,000. The buyer gets the same £2,500 yearly income, but since they paid less for it, their percentage return is higher than what you originally earned.

The core principle: when you pay less for the same fixed income, your yield goes up. Everyone wants a better yield, doesn't want a worse one. It's common sense.

The sweet spot scenario is when a government issued 10-year magic IOU notes at 8% when rates were high (so £80/year on a £1,000 IOU). But now rates have dropped and those bonds are trading at, say, £900. You get £80/year on your £900 investment - that's nearly 9% yield, plus you'll get the full £1,000 when it "matures."

This happens because:

• The government was desperate to borrow when rates were high, so they offered juicy coupons.
• Now rates are lower, so newer bonds pay less.
• But the old high-coupon bonds are like gold - people will pay premium prices for them.
• However, if you can find someone who needs to sell quickly, you might snag them at a discount.

It's like finding a rental property that was built when construction costs were high (so the rent is high to cover costs), but buying it from someone who needs to sell quickly at below market price.

The game is you have to figure what will happen next. Will the new magic IOU notes cost more, or less? Did you get screwed, or did you score a deal? You're making a bet.

And that all depends on how catastrophically incompetent the government is, whether it will collapse, and whether they can actually pay you back.

It doesn't matter if you lent the government £100, and it's only £1.10 or £8.10 over 2 years. It really matters if you lent them £1 billion, and it's £11 million or £81 million.

The current UK national debt is £2,500 billion. Rachel Reeves wants to borrow another £140 billion to pay for stupid socialist crap and to expand the quango state. As the BBC explains, we issued lots of magic IOU notes at a nice fat rate, which you, the taxpayer, are paying back for them:

Meanwhile, there was appetite for shorter-term UK government debt. The UK Debt Management Office sold a record £14bn of 10-year [magic IOU notes] on Tuesday after attracting £141bn worth of orders by investors.

Now let's apply what we know. That means buyers are making a bet: they're buying nice and high. But they may be forced to sell these later at a lower price. Which means the person who buys them later will get a fatter squeeze. It will all depend on:

1. If the idiot government have to do MORE borrowing at an even higher rate and issue new magic IOU notes at an even HIGHER rate than now. You will lose out because yours are then worth less. The IMF may stop them as part of a rescue package.
2. They can't raise enough in tax to pay it back, meaning you'll lose money.

Is it better to take what you have now, or hold out for a different deal? Hold what you have, or sell and get out now? Is Reeves dumb? Is she more likely to screw this up or get it right?

Think like an investor. What will happen? Should you buy now? What's the best gameplan? How safe is your bet?

Still following? Surviving? Not that hard, right?

The Insanity Of The Financial System

The promise on the banknote in your wallet is ultimately backed by another promise in a mind-bending act of recursion: the state will accept it in payment of taxes, and that everyone else will too. You must settle taxes, fines, and other obligations to the state in pounds, which creates a baseline demand for the notes. Courts and contracts recognise the pound as the unit of account, and the Bank of England can issue or withdraw money, set interest rates, and stabilise the currency.

When the UK government issues gilts, it's promising to pay back investors in British pounds. But the UK needs to maintain confidence those pounds will be worth something when it comes time to repay. To do this, the Bank of England holds massive reserves of foreign currencies, and the dominant currency in these reserves is the US dollar.

To maintain that value, the Bank of England needs to be able to intervene in currency markets when necessary. If the pound comes under pressure, the Bank might need to sell dollars and buy pounds to support the currency's value. Those dollars they're selling? They come from their foreign exchange reserves, which are largely composed of US Treasury securities - America's IOU notes.

The UK holds hundreds of billions of dollars worth of US government debt, partly to back up the credibility of its own debt. Meanwhile, many US pension funds and insurance companies hold UK gilts as safe assets. Each country's debt is backing up the other's, creating a web of mutual dependence that's much more complex than simple bilateral relationships.

Yes, this is all mental. Promises backed by other promises, backed up by other people's currencies, which are made of promises, and then... eventually, guns.

When investors flee to safety, they typically rush toward US Treasuries first, then to other major government bonds like German bunds and UK gilts. But the ability of countries like the UK to maintain their "safe haven" status depends partly on their holdings of US debt.

When professional bond traders see economic storm clouds gathering, they start making a calculated gamble. Governments offering to borrow money at high rates indicate a desperate attempt to control inflation or cool an overheated economy when they've inevitably broken it. But they also suspect this "medicine" is a poison which will trigger a recession.

When that recession hits, the government will panic even more. Tax revenues will fall as unemployment rises and corporate profits shrink. The government will find itself in a position where it needs to stimulate the economy to avoid a complete collapse of its tax base. To do that, it will slash interest rates dramatically, making today's "low" long-term rates look attractive in comparison.

So when traders bid up the prices of long-term gilts (driving their yields down), they're essentially saying: "We'd rather lock in a guaranteed 4% from the taxpayers for ten years than gamble on what short-term rates will look like when the government is scrambling to prevent economic catastrophe."

Yield Curve Inversion: The Fire Alarm

During a yield curve inversion, this logic flips completely upside down. Suddenly, that 30-day money might cost you 5.5%, while the 10-year money only costs 4.8%. It's like discovering a hotel charges more for a one-night stay than for booking the entire month.

During an inversion, you might find 3-month IOUs are paying 5.5% while 10-year IOUs are only paying 4.8%. As an investor, you're getting paid less to commit your money for ten years than for three months.

Imagine the yield curve as a marketplace where people are essentially betting on the future. When short-term rates exceed long-term rates, the collective wisdom of millions of investors is saying, "We expect economic conditions to deteriorate so badly that today's high short-term rates will look expensive compared to what's coming."

Strategy A: Keep reinvesting in IOUs at today's 5.5% rate. Strategy B: Lock in the 10-year IOU at 4.8%. If you believe short-term rates will crash to 2% or lower within the next year or two, then Strategy B starts looking much smarter, even though it pays less initially.

It's like everyone at an auction simultaneously deciding paying a premium today for something is foolish because they expect a fire sale tomorrow. This collective pessimism becomes a powerful force which can actually help create the very economic weakness that investors fear. Think of it as economic gravity working in reverse: instead of money flowing naturally from areas of low return to high return, the inverted curve creates an environment where the normal incentives for investment and growth get turned on their head.

Banks fundamentally operate by borrowing short-term money and lending it out long-term. Picture a bank that takes in deposits paying 0.5% interest and makes 30-year mortgages at 6%. The deposits represent short-term borrowing (customers can withdraw their money relatively quickly), while mortgages represent long-term lending (30-year commitments).

During normal times, this works beautifully. The bank might pay 2% on deposits (their short-term borrowing cost) and charge 6% on mortgages (their long-term lending income). That 5.5% difference represents their profit margin and covers their operating costs.

When the curve inverts, this business model breaks down catastrophically. Suddenly, the bank might have to pay 5.5% on deposits while their new mortgage customers only want to pay 4.8% for long-term loans. The bank is literally losing money on every transaction. They're paying more to borrow money than they can earn by lending it out. This forces them to dramatically reduce lending, which chokes off credit to businesses and consumers throughout the economy.

From the borrower's perspective (again, think government or corporations), short-term borrowing becomes expensive while long-term borrowing becomes relatively cheap. The government now pays 6% to borrow money for six months but only 4% to borrow for ten years. If you were running the Treasury, you'd probably think, "This is fantastic! We can lock in cheap long-term funding while these high short-term rates are temporary."

From the lender's perspective (investors), short-term lending now provides higher returns while long-term lending provides lower returns. You earn 6% on six-month IOUs but only 4% on ten-year IOUs. At first glance, this might seem attractive because you're getting paid more for shorter commitments.

The Shockwaves Are Disastrous

The curve inverts not just because of abstract market forces, but because sophisticated investors are making educated guesses about the government's future fiscal position and its ability to manage the economy without destroying its own tax base.

Imagine you're a bond trader in early 2007, holding UK government debt. You see house prices soaring, consumer debt exploding, and banks making increasingly risky loans. You start thinking, "The government is going to have to raise rates aggressively to prevent this bubble from getting worse, but that's going to trigger a massive recession. When that happens, they'll have no choice but to slash rates to nearly zero just to keep the banking system alive."

Armed with this insight, you start buying long-term gilts even though they offer lower yields than short-term instruments. You're not being irrational—you're making a sophisticated bet about the government's future policy constraints and the taxpayers' future ability to support the debt burden.

Now lets imagine you're running a manufacturing company that needs to finance inventory and equipment purchases.

For short-term needs like buying raw materials or covering payroll during slow periods, you suddenly face punishing 6% interest rates on business lines of credit. For long-term investments like building a new factory, you can surprisingly get financing at only 4%. This creates perverse incentives where short-term operational needs become prohibitively expensive while long-term capital investments seem artificially cheap.

Many companies respond by postponing short-term borrowing and operational expansions while potentially over-investing in long-term projects.

Regular consumers face equally confusing signals during inversions. Credit card rates, which are typically tied to short-term rates, spike to painful levels. If you carry a balance, you might suddenly face 20% or higher interest rates. Meanwhile, if you're shopping for a mortgage, you might find surprisingly reasonable rates for such a long-term commitment.

This creates a bizarre economic environment where people are incentivised to take on long-term debt but punished severely for short-term borrowing. Many consumers respond by reducing spending and paying down credit card debt, which further dampens economic activity.

Inverted yield curves represent a breakdown in the normal psychological relationship between time and reward. In healthy economies, patience gets rewarded with higher returns. During inversions, impatience gets rewarded with higher returns, but only if you're willing to constantly reinvest and take the risk those high rates will disappear.

When normal risk-reward relationships break down, people become paralysed by uncertainty or make suboptimal choices collectively pushing the economy towards the very recession which created the inversion in the first place.

It's not just a statistical correlation between rate structures and future recessions. It's actually a real-time display of how economic incentives have become so distorted that normal business operations become difficult or impossible to sustain.

2022/2023: When The Reaper Last Visited

During Covid, governments had pumped trillions of dollars into the economy through stimulus payments, enhanced unemployment benefits, and business support programs. Simultaneously, the Federal Reserve had slashed interest rates to near zero and was purchasing massive quantities of government bonds to keep money flowing through the financial system.

Consumers had accumulated unprecedented savings during lockdowns while simultaneously receiving government payments. When the economy reopened, this pent-up demand collided with supply chains which had been severely disrupted by the pandemic. The result was a surge in prices that initially caught policymakers off guard.

By early 2022, inflation had reached levels not seen since the early 1980s, climbing above 9% annually. In March 2022, the Federal Reserve embarked on one of the most aggressive interest rate hiking campaigns in modern history.

While short-term rates shot up immediately following each Fed decision, long-term rates didn't rise nearly as much. In fact, in many cases, long-term rates actually fell even as short-term rates were climbing.

Picture yourself as a professional bond trader in mid-2022. You're watching the Federal Reserve raise interest rates at a pace not seen since the early 1980s. You understand this aggressive monetary tightening is specifically designed to slow economic growth and reduce demand throughout the economy. You also know from historical experience such aggressive rate hikes typically lead to economic downturns.

As a rational investor, you start thinking several steps ahead. Yes, short-term rates are rising rapidly today, but you expect this aggressive policy will eventually work too well. The Fed will succeed in cooling inflation, but in the process, it will likely trigger a recession. When that recession arrives, the Fed will be forced to reverse course and cut rates dramatically to prevent economic collapse.

This forward-looking thinking explains why investors were willing to accept lower yields on long-term bonds even as short-term rates were climbing. They were essentially saying, "We'd rather lock in today's long-term rates because we expect short-term rates to collapse when the recession hits."

As investors became convinced a recession was approaching, they began what's called a "flight to quality." This means moving money from riskier investments like stocks into the safest possible assets - U.S. Treasury bonds.

When massive amounts of money flow into long-term Treasury bonds, the increased demand drives up their prices. And here's a crucial relationship to understand: when bond prices rise, their yields fall. It's an inverse relationship, like a see-saw. So this flight to safety was simultaneously pushing down long-term yields while short-term rates continued climbing due to Fed policy.

The curve reached its peak inversion of 1.1 percentage points in July 2023.

The Federal Reserve had been raising rates for over a year, and the effects were beginning to ripple through the economy. Housing markets were cooling dramatically as mortgage rates climbed above 7%. Consumer spending was showing signs of strain. Corporate earnings were beginning to disappoint. Regional banks were failing due to interest rate pressures on their business models.

At this moment of peak inversion, the bond market was essentially screaming economic disaster was imminent.

By March 2024:

The 10-year Treasury yield briefly topped that of the 2-year on Monday, marking the first time the yield curve has uninverted since July 2022.

The present yield curve, which has lasted more than two years, is the longest on record.

The curve finally uninverted in August 2024 – one year ago. Pay close attention to the paradox here: the yield curve returned to normal not because the economy got stronger, but because it showed signs of getting weaker.

One possibility is the recession was delayed rather than prevented. Economic cycles don't always follow precise timelines, and various factors might have extended the timeline beyond historical norms. Government spending programs, changes in consumer behavior, or structural shifts in the economy might have provided temporary buffers against recessionary forces.

Another interpretation is the unprecedented nature of the economic shock which created the inversion - the combination of pandemic-related disruptions, massive fiscal stimulus, and supply chain problems - created conditions which don't map neatly onto historical precedents.

The Most Reliable Harbinger Of US Economic Doom

The inverted yield curve stands as one of the most reliable recession indicators in modern economic history, with an extraordinary track record which spans nearly a century. The first instance of an inverted yield curve occurred back in 1929 just before the Great Depression, which continued for more than a decade.

The yield curve remained inverted to October 1922, and re-inverted from February 1923 - April 1924. The May 1923 - July 1924 recession began and ended 1 year post-inversion, but the middle of that recession coincided with normal, positive interest rates. There was another, brief inversion between January-April 1926 which does generally fit with the recession of October 1926-November 1927. More significantly, the long inversion which began in September 1926 does not coincide with any recession until the Great Depression began later in 1929. The 1929 inversion was particularly severe, featuring Fed interest rates 6% over the inflation rate, the most serious inversion until 1981 when Paul Volker killed inflation by raising interest rates some 9% over the inflation rate.

The yield-curve slope became negative before each economic recession since the 1970s. However, there was one notable exception which tests the rule. The last time an inverted curve did not lead to a recession occurred in 1966. It was the only instance where this spread inverted and a recession did not follow, or the one "false positive."

There were 17 years (21% of the 80 years) when there was at least one week of inverted yield curve: 1927, 1928, 1929 1930, 1959, 1966, 1967, 1968, 1969, 1970, 1973, 1974, 1979, 1980, 1981, 2000, and 2006, with many of these years clustering around recession periods.

The Recession of 1969 - 1970 was relatively mild, lasting for 11 months, beginning in December 1969 and ending in November 1970, following an economic slump which began in 1968 and by the end of 1969 had become serious.

The 1973-1975 recession followed this established pattern, with the yield curve inverting in advance of the economic downturn. The stagflationary period of the late 1970s and early 1980s produced multiple yield curve inversions and corresponding recessions. The previous record was 624 days set in 1978-1979, which preceded the severe recession of the early 1980s. The Paul Volcker era at the Federal Reserve created particularly dramatic inversions as the Fed aggressively raised interest rates to combat inflation.

A few European yield curve inversions (the early 1980s in the U.K., the late 1970s in France and the early 2000s in Germany) were almost synonymous with the start of recessions, but in each case inversion occurred slightly before or at the same time as the downturn: 1980 Q1, 1980 Q2, 1980 Q3, 1980 Q4, 1981 Q1 (5 Qtr) 1980 Q1: −1.7%, 1980 Q2: −2.0%, 1980 Q3: −0.2%, 1980 Q4: −1.0%, 1981 Q1: −0.3%.

The 1990-1991 recession continued this predictive pattern: the yield on the 30-year bond fell below the yield on the 2-year bond in 1989, 2000 and 2006, with the 1989 inversion preceding the early 1990s recession. It was relatively mild but nonetheless followed the established pattern of being preceded by yield curve inversion.

The early 1990s recession followed a different pattern in Europe: 1990 Q3, 1990 Q4, 1991 Q1, 1991 Q2, 1991 Q3 (5 Qtrs) 1990 Q3: −1.1%, 1990 Q4: −0.4%, 1991 Q1: −0.3%, 1991 Q2: −0.2%, 1991 Q3: −0.3%. It was closely tied to Britain's membership in the European Exchange Rate Mechanism and the subsequent Black Wednesday crisis in 1992. The yield curve behavior during this period was complicated by the external constraints of the ERM, making traditional recession indicators less reliable.

The dot-com recession of 2001 reinforced the indicator's reliability again: the yield curve had inverted in 2000, approximately 6-12 months before the recession began in March 2001. This inversion occurred as the Federal Reserve raised interest rates to cool an overheating economy driven by speculation in technology stocks.

The Great Recession of 2008 - 2009 perhaps provided the most dramatic vindication of the yield curve's predictive power. For instance, the yield curve inverted initially in January 2006, which was 22 months before the start of the 2008 recession. This nearly two-year lead time gave the inversion exceptional forecasting value, though few heeded its warning before the financial crisis devastated global markets.

The COVID-19 recession of 2020 represented an unusual case, however. The 2020 recession did not follow the trend of previous recessions in the United States because only six months elapsed between the yield curve inversion and the 2020 recession. This abbreviated timeline reflected the sudden, exogenous nature of the pandemic-induced economic shutdown rather than the typical business cycle dynamics which drive most recessions.

Since the late 1970s, an inverted yield curve has preceded every U.S. recession. Of the seven instances, the interval between an inverted yield curve and the onset of a recession ranged from 6 to 24 month, while over the last five decades, 12 months, on average, has elapsed between the initial yield curve inversion and the beginning of a recession.

The longest and deepest Treasury yield curve inversion in history began in July 2022, as the Federal Reserve sharply increased the fed funds rate to combat the 2021–2023 inflation surge. This inversion lasted for over two years – a record. Before this, the yield curve had been inverted for a staggering 783 consecutive days, the longest such period in U.S. history.

Prior to the 2020 recession, the yield curve was only inverted for 141 days, which was much shorter than the average 248 days preceding the previous five U.S. recessions. For instance, the yield curve was inverted for 235 days between the inversion in January 2006 and the start of the 2007-2009 recession. It suggests longer inversions may signal more severe economic disruptions.

2025: The YooKay Starts Borrowing Short Term

The Bank of England's extensive intervention in the gilt market through quantitative easing (money printing) programs has fundamentally altered the traditional relationship between yield curve behaviour and economic fundamentals. UK gilts saw an inversion during summer 2019.

In contrast to the United States, where the yield curve has an almost perfect track record since the 1960s with only one false positive, Britain's experience has been marked by multiple false signals, unclear timing relationships, and recession episodes that occurred without clear yield curve warnings, making it a far less dependable forecasting tool for British economic cycles.

The structural differences in the British economy, the active intervention of the Bank of England in gilt markets, the external constraints of European monetary arrangements during various periods, and the unique political and policy shocks that have affected Britain all combine to make the yield curve a much less reliable recession predictor than it has proven to be across the Atlantic.

The UK government is being forced to abandon its preferred borrowing strategy due to market pressures and its gilt rate sits at the highest sincest the 90s. It would much rather borrow long-term money at predictable rates, locking in funding costs for decades. But the market is telling the Treasury: "We're not interested in lending to you for long periods at rates you can afford."

This represents a fundamental shift in how the UK government manages its debt. Historically, governments preferred long-term borrowing because it provided predictability and reduced the frequency of having to return to markets for refinancing. When you borrow for 30 years, you don't have to worry about what interest rates will look like for three decades. When you borrow for 9 years, you're constantly exposed to changing market conditions.

Investors are demanding significantly higher compensation for long-term lending, suggesting they're worried about inflation, fiscal sustainability, or both. They're saying, "We want much higher returns to compensate us for the risk of lending to you for thirty years."

The UK government is turning to short-term borrowing to ease rising interest costs as weak investor demand and global market turmoil strain its budget.

This marks a shift from its usual reliance on long-term debt, as surging interest rates worldwide make future borrowing more expensive.

https://www.mitrade.com/insights/news/live-news/article-3-846027-20250527

Investors clearly expect short-term interest rates to remain elevated for some time - otherwise, short-term gilt yields wouldn't be as high as 4%. Second, they're demanding substantial additional compensation for long-term lending, suggesting concerns about long-term inflation, fiscal policy, or both.

Why Do You Care?

The 30-year gilt yield hitting 5.7% is basically the bond market's way of saying "we don't trust the UK government to manage its money properly." They are giving the UK government a report card which says "D- - needs improvement." At 5.7%, investors are demanding a hefty premium to lend money to the UK for 30 years because they're worried about whether they'll get paid back in real terms.

5.7% for IOU notes is the highest it's been since Blair/Brown in 1998 - nearly 27 years (what a coincidence!). The government is now paying through the nose to borrow money for another 30 years. This could get worse before it gets better - some analysts think yields could hit 7% if confidence doesn't return soon.

Mortgage rates follow gilt yields pretty closely. When gilts go up, so do mortgage rates. This means anyone looking to buy a house or remortgage is going to face higher monthly payments. First-time buyers are getting squeezed out even more.

The pound dropped 1% against the dollar today because investors are losing confidence in the UK. A weaker pound makes everything we import more expensive, which pushes up inflation.

• Investors think socialists are spending too much money the government doesn't have
• There's too much socialist government debt and not enough people willing to buy it at reasonable rates
• Global factors like sticky inflation are making all government IOUs less attractive
• The market thinks the Bank of England won't cut interest rates as much as expected
• The socialist government might have to raise taxes or cut spending to balance the books - and we all know which of those they will choose.

Money is a language, and it talks. The markets are speaking, as they always do.

Socialism is a language of abstract ideas and does not produce anything: you cannot cash a check for ideology at the bank. It only redistributes what others produce. Socialists can't pay for their ideology, so they have to borrow from the very thing they oppose and do not understand – markets. Markets are swarms of collective wisdom which don't like surprises unless they're profitable, or people who can't pay back what they want to borrow.

Listen to what they're saying before you vote.