Kidology in Liverpool; the gilt premium shrinks
A welcome housing scheme, then two conference speeches: one promising a new age of industrialisation with Europe’s dearest electricity, the other a care system the triple lock savings can’t pay for. And gilts yield barely more than Treasuries.
First published in Noise Cancelling
This has been an interesting week for anyone interested in British politics. This update covers a couple of the most interesting talking points following Andy Burnham’s announcements last weekend and the Labour Party conference that ended on Wednesday. A couple of other issues that captured my attention this week include President Trump’s rejection of Iran’s proposals to end the conflict in the Gulf and fully open the Strait of Hormuz, some important new economic data from the UK, and the ongoing contradictions plaguing EU policymakers as they confront the existential industrial challenges posed by China’s massive export surplus with the EU, felt most acutely in Germany.
The most notable feature in financial markets this week is the weakness of global bond markets and consequent rising yields. As ever, the media explores all sorts of apocalyptic but wrong explanations, including the idea that governments are reaching the limit of what markets will tolerate in terms of borrowing. In this update, I will cover what’s really going on again, explain why it’s not unusual, and finish by showing why, in my opinion, the risk premium on the UK gilt market is falling rather than rising.
A first home, and some good news
First, the interesting developments in British politics this week. Surprisingly, the week started with some positive news: Andy Burnham announced that the government will launch a reincarnated Help to Buy scheme, called Your First Home, with details to be announced in the budget on 28 October.
The scheme is designed, rather obviously, to help first-time buyers achieve the dream of home ownership by providing a 20% equity loan, interest-free for an initial period, to first-time buyers with a regular income who can put up a 2.5% deposit on a new-build home in England. The scheme will apparently open for registration by the end of this year and should have a significant impact on the market. Many young people who can’t save a large deposit (normally 10%*) can immediately qualify for this government help and will be looking for an appropriate new home. Inevitably, this will increase new-build volumes and provide a welcome boost to the housebuilding industry.
(*Banks do provide 95% LTV mortgages, but because of the higher capital penalty the regulator imposes on these mortgages, the rates charged on them are significantly higher than on 90% LTV mortgages, and so there are not many takers of these more expensive loans.)
A new age of industrialisation?
Unfortunately, that’s where the good news came to a shuddering halt. Naturally the week was dominated by the speech the Prime Minister gave on Tuesday, which fortunately overshadowed the so-bad-it-was-funny Chancellor’s speech in which, amongst all the other economically illiterate nonsense, he claimed that he would be ushering in “a new age of industrialisation”.
That comment more than any other encapsulates the gap between the hubris of politicians and the cold hard reality of global economics. Apart from the very obvious fact that politicians cannot usher in anything, the idea that the UK can re-industrialise against the backdrop of the highest industrial electricity prices in the developed world is not just dishonest, it’s moronic.
I wonder if he is at all aware, for example, of the challenges confronting German industry right now, which is struggling to halt de-industrialisation with industrial electricity prices more than 40% lower than in the UK.
British industry pays the most for its electricity
The Prime Minister’s speech
Anyway, back to Mr Burnham’s speech very briefly. Political commentators have heralded the speech as powerful, policy-heavy and steeped in political conviction, and one described it as the most serious speech delivered by a British prime minister since Theresa May left office in July 2019.
I am no political hack, but I have to disagree. I will concede that it was political and had conviction, and I’m pretty confident that it was the speech Andy Burnham had been itching to deliver to a conference audience for many years. It did also outline some new policy “initiatives”, but I would not describe it as serious.
The speech focused on Burnham’s personal, political, statist agenda. For example, it covered a closer relationship with the European Union, up to and including rejoining (the next day he told the BBC the UK “could go all the way”), more public control of water, energy and housing, electoral reform, and the scrapping of the state pension triple lock, which from 2030 will in effect become a double lock with minimum annual increases of 2.5%, the “savings” from this change apparently partly funding a new free at the point of need social care system.
I am not disputing that these are serious political issues, and especially the last one, but I would dispute that they are anywhere near the top of the concerns of most people. The economy, defence, law and order, the health service, the cost of living, youth unemployment, education, AI and immigration got passing mentions at best. These are tough issues no doubt, but none of them got anything like the same attention.
As an aside, I was told that the reason rejoining the EU was back on the agenda is that Mr Burnham envisages the need to join up with the Lib Dems at the next election in order to secure power, so this announcement might need to be seen in this context to understand its relevance to the PM now.
The triple lock won’t pay for care
As for the new free at the point of need social care system, let me put some numbers on the triple lock savings to help put this kidology into context. In 2030 the state pension is likely to be costing something close to £181bn a year. Every percentage point knocked off the annual increase “saves” the Exchequer about £1.8bn. But the new lock still guarantees at least inflation or 2.5% a year, and the pension is still meant to keep pace with earnings over time, so all that goes is the ratchet that pushes it ahead of earnings.
The IFS expects the savings to be relatively small for the first few years. Meanwhile, the cost of free personal care is estimated at around £7.5bn a year by the mid-2030s, and of a universal, NHS-style service at £18.5bn. Quite quickly one can see that the theoretical savings from scrapping the triple lock come nowhere near covering the cost of this care system.
Clearly, if such a system is put in place it will require significantly higher taxes or borrowing to pay for it; for years to come, the pension savings are a myth.
My interpretation of this speech is that it was certainly personal and had conviction, but it was tailor-made for a narrow conference audience Mr Burnham wanted to please. As for the wider national audience, my guess is that the speech will be viewed as utterly irrelevant, given that the greatest concerns for people living in the UK are immigration, the economy, the cost of living and the NHS, in that order.
What voters worry about, and what the speech was about
Trump says no, for now
Elsewhere, at the weekend Mr Trump rejected Iran’s terms for a peace deal. This may reflect the fact that there are increasingly reliable reports of crude shipments leaving the Gulf that are back at pre-war levels, and on the latest weekly numbers above them, and others highlighting that refined product shipments are also growing, albeit from a low base. It may also reflect the widespread reports of increasing stress being placed on the regime in Iran as a result of the ongoing blockade of Iranian ports.
My guess is that markets may have underestimated Iran’s resilience in the face of these pressures, but also underestimated Trump’s desire to carry on pressuring the regime in Iran despite the unpopularity of the war and its consequences for fuel prices and inflation in the US. Having said that, given the continuing dialogue between both sides (through intermediaries), my guess is that a negotiated settlement is achievable, and that renewed conflict is less likely.
Good news on the economy
In other news, the ONS announced this week that the UK economy had grown more quickly in Q2 than it had first estimated: 0.5% rather than 0.4%. This is unequivocally good news and reflects what I’ve been saying all year, which is, in summary, that consensus was wrong and way too bearish, and that the economy would perform well through 2026.
My underlying rationale was and is that the household sector would see lower saving and more consumption growth, and that appears to be exactly what’s happening. The latest ONS data shows household saving at 8.75% of total available resources (disposable income plus adjustments for pension payments, social benefits and property income less taxes) in the first half of 2026, continuing the downward trend established last year, when saving in the first half was 10% and fell to 9.25% in the second half.
Households are saving less, and spending more
I also said that business investment would continue to be strong (this was very non-consensual) and that is also what has transpired this year: in the second quarter it was 5.2% higher than a year earlier. (I will publish a note going into this in a bit more detail next week.)
Europe’s contradictions
I was interested to read about the ongoing political debate in Europe focused on the serious economic challenges confronting the EU. There are no easy answers and, as ever, the interests of individual states typically conflict with initiatives proposed by the Commission.
This is especially evident in the debate about the “Made in Europe” proposals, which are designed to help protect strategic industries across the union from rapacious Chinese competition. As ever, the debate is polarised between those countries whose industries are threatened and those that aren’t. There are also similar conflicts erupting over the new EU seven-year budget proposals, which Germany and five of its friends say must be cut by several hundred billion euros.
These and other fundamental issues will continue to preoccupy the EU and highlight to me why the question of the UK rejoining, promoted by Mr Burnham this week, is so convoluted. The Europe of today is not the one the UK left nearly seven years ago, and that’s why its growth rate so far this year is below that in the UK, as are its interest rates. These issues will be right at the top of the agenda in 2027, when France, Italy and Spain all face national elections, and Germany five important state elections.
Inflation, not borrowing
The biggest issue in financial markets this week has again been rising bond yields. As ever, the prophets of doom suggest that markets are sending a signal to governments everywhere that the limits of state borrowing are in sight, with all sorts of associated and unpleasant consequences. Regular readers will know that this is a very popular narrative with which I completely disagree. I think it’s rubbish, in fact. Bond yields have risen for one simple reason, and that’s entirely down to inflation, which itself is a product of what’s happened to energy prices.
Over the long run, as this chart makes clear, the dependent variable (ten-year yields – y axis) is driven by what’s happening to the independent variable (Fed funds – x axis), with an R² of about 0.8. When the latter is at 4%, which is where it is now, you should expect US ten-year bond yields to be very close to 5.3%, which is, surprise surprise, very close to where they are right now – 5.272%.
Fed funds at 4% puts the ten-year at about 5.3%
What you should also expect, given the close relationship between ten-year yields in the US and those in the UK, is that UK yields will be somewhere close to 40bps above those in the US, which is roughly where the gap has averaged over the past year. Today they are in fact only 13bps above, suggesting to me at least, and to anyone else paying attention to the facts, that the risk premium in the UK ten-year gilt is diminishing, not increasing as most commentators are claiming.
The gilt premium over Treasuries has all but gone
What to look out for next week
After a relatively quiet week for macro news, next week is also pretty quiet, with most attention likely to be paid to the fallout from today’s US labour market data and the minutes of the Fed’s September meeting on Wednesday.
The corporate calendar is also subdued, thankfully, but I do expect lots of attention to be focused on the situation in the Gulf, oil and refined product flows, and the crude price. Ultimately it is the single biggest driver of inflation concerns right now, and of government bond yields.
Important information
The views expressed in this article are those of the author at the date of publication and not necessarily those of Curated Capital Ltd. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.
