UK bond vigilantes ride again

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0:17Good morning from the Financial Times. Today is Wednesday, May 13th, and this is your FT News Briefing. UK gilt investors don't get to choose the country's next prime minister, but they are certainly making their voices heard. And some new numbers show just how tough things are for Blue Owl right now. Plus U.S. inflation, woof. So far, since the Iran war began, households had spent about$37.9 billion extra on gas as a result of the conflict. I'm Mark Filippino, and here's the news you need to start your day.

1:04UK bond traders are not happy with the country's political situation right now. There's mounting pressure on Prime Minister Keir Starmer to step down, and gilt investors are worried about who would replace him. So-called bond vigilantes are sending that signal through a sizable debt sell-off. 30-year gilts hit their highest level since 1998 this week. Here to discuss what exactly gilt investors want or don't want is FT Senior Markets correspondent Ian Smith. Hi, Ian. Hey, Mark. Ian, let's talk about this idea of the bond market communicating through sell-offs, this idea of bond vigilantes. We've seen this in the past with former Prime Minister Liz Truss in 2022 when the bond market went through a massive sell-off and forced her to resign.

1:48What is their deal? So this idea of bond vigilantes really describes the pressure that the bond market can put on a government through the fast rise in borrowing costs that I've described there. So at a certain point, these borrowing costs, if they continue to rise, will reach a level where they'll force the government to change tack, as effectively happened in 2022 with LizTrust, as you mentioned. So that is a moment when the bond market says, I've had enough. There's too much risk here. We're going to have to demand a lot more compensation to lend to you to a level that that becomes really problematic for the government and it has to respond.

2:25Now, we should say that UK bonds weren't in a great place even before Starmer's leadership crisis, right? Yeah, they certainly have been since the outbreak of the Iran war. What we've had now in the gilt market is a inflation shock coming from oil prices surging above$100 a barrel, mixing with a political shock as investors brace for the potential end of the premiership of Sakhir Starmer. The combination of those two things has forced up UK borrowing costs. And investors have a list of priorities of the people they would prefer replace Starmer if he were to go. Lay out who the candidates are right now and which ones bond investors do prefer.

3:07So we've conducted a kind of straw poll of big bond fund managers for who they would think would be the most market-friendly, most market-unfriendly of the potential challenges to secure Starmer in a leadership race. Of the 10 fund managers that we spoke to, nine said that Wes Streeting, the health secretary, would be the most market friendly. He's viewed as a status quo centrist who might continue with the fiscal adjustment that is being conducted by Starmer and his chancellor, Rachel Reeves. The problem with Streeting is that he's not hugely popular in the parliamentary Labour Party and investors recognise this.

3:45He views us close to Starmer, so less of a break from the current regime. and the candidate seen as the most market unfriendly is Andy Burnham, currently the mayor of Greater Manchester. And he's someone that most investors in the market are more fearful of. And why are gilt investors so concerned about Andy Burnham? So the main fear for gilt investors is that Labour will shift left under a new leader and drive up government borrowing. Burnham is the bookie's favourite to replace Keir Starmer as Labour leader. said last year that the government should not be in hock to the bond market. So people are nervous that were he to be the next prime minister of the UK, that there would be a big rise in long-term debt issuance.

4:31The UK already has a lot of long-term debt. We currently spend more than 100 billion pounds a year just servicing it. And investors are really sensitive to any suggestion that that will rise in future. As of right now, Ian Starmer has said that he isn't going anywhere. What could that mean for the gilt market? What investors say to me is, as long as this uncertainty remains, there is going to be this risk premium in gilt yields. So the 30-year gilt yield that we focused on here is particularly vulnerable to the risk that there is more gilt issuance in future than investors currently expect. Ian Smith is the FT's senior markets correspondent.

5:11Thanks so much, Ian. Thank you.

5:18Blue Owl has been a prime example of U.S. private credit worries. Investors are concerned about how advancements in AI will hit software companies, which private markets are really exposed to. Now, the FT got its hands on some new numbers that show just how bad things have gotten for Blue Owl. Inflows at the group's largest fund have basically dried up. The fund reported just$26 million in new investments on May 1st. That's about half of what it was in April, and a 95 % decrease from this time a year ago. A spokesperson for Blue Owl declined to comment. Earlier this year, investors requested to redeem over 20 % of their cash from the fund.

5:56That caused Blue Owl to partially limit redemptions. The lack of inflows will put even more pressure on the fund's liquidity, but Blue Owl has said it has ample cash resources and expects to bring in more in the coming quarters.

6:14U.S. inflation jumped to its highest level since 2023 last month. Government data out yesterday puts it at an increase of 3.8 % compared to the same time last year. That's up from 2.4 % in February before the war in Iran started. Higher gas prices largely drove up the consumer price index, but core inflation was up too. The CPI report is the latest indication of how much the conflict is reverberating across the U.S. economy. The FT's Claire Jones joins me now to explain. Hi, Claire. Hi, Mark. So, Claire, as I mentioned, fuel is getting more and more expensive here in the U.S. What kind of impact is that having on the U.S.

6:56economy? So we've seen fuel prices rise by more than half since the conflict erupted. And it's really having a tremendous impact on a US consumer that drives an awful lot. Brown University has got this excellent tracker, which shows the burden on US households. And it's found that so far since the Iran war began, as of yesterday, around midday, households had spent about$37.9 billion extra on gas as a result of the conflict. That's incredible. And that's why U.S. President Donald Trump and American lawmakers are pushing to try and suspend the federal tax on gas. what impact could these higher fuel prices have on the economy down the line?

7:47Well, you know, this brown tracker, it's about the impact we've seen so far on gasoline and diesel prices. But if prices remain this high, you'd expect to see the impact seep through, you know, other areas of the U.S. economy. For instance, food prices. A big aspect of those is transportation costs. Another impact of those is fertilizer prices, which have also soared as a result of the Iran war. So if the war continues in the months ahead, we'll see goods such as food impacted too. Okay, so the war has caused inflation to skyrocket and higher prices could ultimately lead to lower economic output.

8:26Can you explain this domino effect and how big of a hit to gross domestic product we could see? So before the conflict began, you know, most people thought the Fed was going to cut interest rates by a quarter point twice this year. Now that we've seen inflation surge, that's off the cards. Now, lower interest rates mean more demand. That means more output in the U.S. economy. And without that increased demand and the boost that interest rates are going to give you, economists are predicting both at the Fed and elsewhere something like$200 billion. in lost output. Wow. So you have this perfect storm here of a massive amount of lost output plus higher fuel prices, higher prices generally caused by the war in Iran.

9:15This is really tough for President Trump, who ran in 2024 on affordability. Given the economic impact that we're talking about, how big of a problem is it for him and the Republican Party in the run-up to this falls midterm elections? You know, I'm not a politics reporter, but it's certainly my impression that the affordability crisis was something that hit the Democrats very hard in 2024. And in light of that, I'd be very surprised if it doesn't impact Republicans again at the polls for the midterms in November. Claire Jones is EFT's U.S. economics editor. Thanks, Claire. Thanks, Mark.

10:05In an update on last week's unsolicited bid by GameStop to buy eBay, it was pretty short-lived. eBay rejected the$56 billion offer yesterday. In a letter to GameStop, eBay said it had concerns over the risks of combining the two companies, the video game retailers' governance, and the deals' financing. eBay, after all, is four times more valuable than GameStop. But this rejection could push GameStop CEO Ryan Cohen to launch a hostile bid. Like we talked about last week, he hasn't ruled out taking his offer directly to eBay shareholders. GameStop did not immediately respond to requests for comment.

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