London shares tumbled as worries about government debt spread through global markets, and the reasons are closer to your mortgage than you might think

FTSE 100 Falls as Bond Market Worries Bite: A Plain Guide

I try not to write about the stock market going down, on the grounds that it goes down quite often and then goes up again, and neither event changes what I am having for tea. This week I am making an exception, because what moved shares was not really about shares.

The headlines on the London Stock Exchange’s news pages tell the story in sequence. “LONDON MARKET MIDDAY: Stocks slide as global bond sell-off deepens,” then “LONDON MARKET CLOSE: FTSE 100 tumbles as bond market worries bite.” By the following morning the early call was for a partial recovery, with yields easing ahead of American jobs figures.

A daily business bulletin put a number on it: on 1 October the FTSE 100 was down 1.27 percent at 10,471.35. The day before, according to an early market report, the index had closed at 10,606, and futures were already pointing lower even though US inflation data had come in tamer than feared. Yields, particularly on longer-dated bonds, remained elevated.

What a Bond Sell-Off Is

A government bond is a loan to a government. In Britain they are called gilts. The government pays interest and returns the money at the end.

Bonds are traded. When investors sell them, the price falls. When the price falls, the yield, which is the return a new buyer gets, rises. So “yields are rising” and “bonds are selling off” are the same event described from two ends.

Why would investors sell? Usually because they expect higher inflation, higher interest rates, or because they are worried about how much governments are borrowing and want a better return for the risk.

Why Shares Mind

If you can get a decent return from a government bond, which is about as safe as investments come, shares look less attractive. Money moves. Share prices fall.

Higher yields also mean higher borrowing costs for companies, and a lower value placed on profits they expect to make years from now. Both weigh on prices.

Why You Might Mind

Here is where it reaches N8.

Gilt yields feed into mortgage rates. Lenders price fixed-rate deals off market interest rates. When those rise, new mortgages get dearer. If you are remortgaging next spring, a bad week in the bond market is not abstract.

They feed into the public finances. The more it costs the government to borrow, the less it has for everything else. The same news page notes the debt office planning an extra sale of a gilt for up to 1.5 billion pounds. With a Budget weeks away, the Chancellor’s room for manoeuvre shrinks every time yields tick up.

And they affect pensions. Funds hold large quantities of bonds and shares. A fall in both at once is not what a person approaching retirement wants to see on a statement.

Is This a Crisis?

No. Or not on the evidence of one week. A fall of just over one percent is an ordinary bad day. The index remains above ten thousand, a level that would have seemed fanciful a few years ago. By Friday the mood was already steadier.

I say this because market reporting has a tendency to treat every dip as the beginning of the end. Most are not. If you have a pension or an ISA invested for the long term, the sensible response to a bad Thursday is usually to do nothing.

What Is Worth Taking Seriously

The underlying worry is real, though. Governments around the world, including ours, have borrowed heavily and are paying more interest on it than they have for years. Investors are less relaxed about that than they were. That is a slow pressure, not a sudden one, and it is not going away.

British readers will remember the autumn of 2022, when a mini-Budget sent gilt yields soaring and a Prime Minister out of office in a matter of weeks. Nobody is suggesting a repeat. But that episode taught the Treasury, and everyone else, that the bond market has a vote.

The Rest of the Tape

Away from the big picture, the same pages carried ordinary corporate news. A trading platform’s shares slid after it cut its revenue outlook. A budget airline reported passenger numbers up by nearly a quarter in September. A tile retailer and an energy company had trading statements due. Business carries on while the indices sulk.

That is worth remembering. “The market” is a number. Underneath it are thousands of firms selling flights and grout and electricity, most of whom had a perfectly normal week.

What I Would Do

I am a journalist, not a financial adviser, and nothing here is a recommendation. For what it is worth, my own approach is dull. I pay into a pension monthly whatever the index is doing. I do not look at the balance more than twice a year. If I had a mortgage deal expiring soon I would speak to a broker now, not after the Budget.

The Thing to Watch

The date in everyone’s diary is the Budget at the end of the month. Bond investors will be listening for how much the government plans to borrow. If they like what they hear, yields may ease. If they do not, there will be more Thursdays like this one.

In the meantime, the kettle is on, the FTSE is a number on a screen, and tea is unaffected.

And for Light Relief

The stock market and its inhabitants are a staple of British humour. The London Prat provides it in its British satirical news on the stock market and London satirical news about City traders, where you can also find more of my market notes. Bohiney Magazine covers Wall Street.

SOURCE: https://bohiney.com/