JAMES CARVILLE, political adviser to Bill Clinton, the former president, famously said that he wanted to be reincarnated as the bond market so he could “intimidate everybody”. He was frustrated by the administration’s inability to push through an economic stimulus for fear of spooking investors and pushing bond yields higher.
More than 20 years later, the world looks very different. Many developed countries have been running budget deficits ever since the global financial crisis of 2008; their government debt-to-GDP ratios are far higher than they were in the early 1990s. Yet the bond market looks about as intimidating as a chihuahua in a handbag; in general, yields are close to historic lows.
In the 1990s “bond-market vigilantes” sold their holdings when they feared that countries were pursuing irresponsible fiscal or monetary policies. In Britain even fear of a “hard Brexit” is only now being reflected in rising gilt yields—and they are still below the (very low) levels seen before the vote to leave the EU in June. Even developing countries with big budget deficits can borrow easily. This week, for example, Saudi Arabia…Continue reading