Will the 'bond vigilantes' claim their second British PM? Inside Andy Burnham's high-stakes battle

In recent years, much has been blamed on so-called ‘bond vigilantes’ – financial hotshots said to be responsible for toppling leaders and dictating policy by selling – or threatening to sell – government bonds.In Britain, these supposed vigilantes are widely credited with bringing down Liz Truss as prime minister. And they are now said to be poised to pounce on Andy Burnham, as concerns about a spendthrift Labour government push the UK’s borrowing costs to their highest level since the 2008 financial crisis.Unlike their crime-fighting namesakes, bond vigilantes punish governments they regard as fiscally irresponsible.The term was coined by American economist Ed Yardeni during Ronald Reagan’s presidency in the 1980s to describe investors dumping US Treasury bonds in protest at Federal Reserve policies they believed were inflationary.Selling bonds drives their prices down, which in turn drives yields, the effective interest rate paid on them, up, making it more expensive for governments to borrow and often forcing a policy rethink. The vigilantes reappeared during Bill Clinton’s presidency when yields on US ten-year Treasuries climbed above 8 per cent, triggering what was named the Great Bond Massacre of 1994.It prompted Clinton’s adviser James Carville to remark: ‘If there was reincarnation, I’d like to come back as the bond market. You can intimidate everybody.’Truss discovered that reality after her September 2022 mini-Budget sparked a sell-off in UK government bonds, known as gilts, sending yields close to 5 per cent and triggering a crisis in the liability-driven investments held by pension funds, prompting an emergency intervention by the Bank of England.And it is why Burnham received such a roasting in September last year after claiming Britain should not be ‘in hock to the bond markets’, sending 30-year gilt yields to a 27-year high.The tough task facing Andy BurnhamNow Burnham is Prime Minister, he has softened his language, promising to use ‘any flexibility’ within the fiscal rules. But the market is unconvinced. Rising oil prices have reignited global inflation fears, pushing the UK’s ten-year borrowing costs to about 5 per cent, their highest since 2008.Thirty-year yields reached 5.8 per cent, their highest since 1998.If Burnham believes nuance will placate the bond vigilantes, many think he is mistaken. Anthony Peters, a self-described ‘old bond dog’, argues that in fact there is no such creature as a bond vigilante, adding: ‘It’s far more dangerous than that. The whole gilts market is the vigilante. That’s its job.’The vigilantes, he says, exist only in the minds of those who believe traders conspire against governments. But, he says: ‘It’s got nothing to do with being in hock to the markets. It’s maths. If investors think something bad will happen, they sell.’Britain now borrows at higher rates than Portugal, Italy, Greece and even Morocco. US bond yields have also soared over worries about America’s budget deficit, triggering the controversial move by US Treasury Secretary Scott Bessent to intervene with a bond buy-back programme aimed at lowering borrowing costs.However, fighting against the market almost never works – long-dated yields have shot up again.Yields matter. Servicing the UK’s £3trillion national debt costs £120billion a year. So each upward twitch in yields adds to the burden on taxpayers. Keeping yields low is vital, not only to refinance existing debt but for new borrowing.Why this isn't a Liz Truss moment... yetYet if yields are higher than in the Truss chaos, why is there no similar panic? Chris Fellingham, dubbed the City’s gilts king after 40 years of trading, says the market has priced in catastrophe.‘We are at an impasse until John Healey’s first Budget. The market is treading water,’ he says. ‘Despite all the damaging Budget leaks, we don’t know what they are planning. It’s a game of wait and see.’Chris Fleming, formerly of Japanese bank Nomura, agrees saying: ‘The markets decide. Right now, no one wants to buy ten-year gilts, let alone 30-year paper. Maybe if yields move closer to 6 per cent they’ll have a nibble. Investors lost confidence after Reeves’ first Budget, and it’s not returned.’He says we’re seeing a slow-motion crash: ‘Investors don’t see signs of growth. They see only the politics of envy. Bond markets are the best intelligence source you’ll get for where a country’s heading.’Britain is in a fiscal trap, argues George Cooper at Equitile Investments, saying: ‘Burnham’s trapped by deteriorating public finances, with every extra pound of spending widening the deficit. 'War bonds are sticking plaster. Underlying the problems is that we’re below population replacement levels. Who will pay for future debt?’Markets are also increasingly worried about ‘fiscal dominance’ –the point at which investors no longer believe central banks can control inflation through higher interest rates without rendering governments insolvent. Faced with that dilemma, Cooper argues, policymakers will ultimately tolerate higher inflation.What next for the gilt market? The gilt market underpins our financial stability. Once dominated by UK pension funds, it has altered dramatically. Domestic pension funds and insurers now hold only a third of gilts, while the Bank of England still owns 18 per cent through quantitative easing. Foreign investors control a third, with the rest owned by hedge funds and non-financial corporations, which are becoming more influential.So where next for gilts? Fellingham says: ‘Healey must convince the markets that Labour will work with the private sector to achieve growth. He must set out serious spending cuts in the Budget and maybe a small income tax rise on the middle classes – the rich have been squeezed enough. This could raise £30billion to pay down debt.’There are even signs among Burnham’s allies that the Government is realising difficult choices must be made to stop the cost of Britain’s borrowing spiralling further out of control.Mortifyingly for the Prime Minister, Jim O’Neill, his former economic adviser, said the Government must rein in the ‘excesses’ of spending on areas such as the pension triple lock and the welfare system if it is to regain the confidence of bond markets.Even more embarrassing for the Government, Andy Haldane, former Bank of England economist and now head of the British Chambers of Commerce, and another potential PM adviser, has argued against raising taxes again, saying the UK has reached ‘saturation point’ and that any higher taxes will harm future growth.And if Healey fails to convince the markets? Fellingham says: ‘If Labour does something stupid like wealth taxes, which will reduce tax revenue and drive more talent overseas, we’re f*****.’For Burnham, the message is simple: disrespect the bond market at your peril.DIY INVESTING PLATFORMSAJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you