While the pound falls, the interest that the UK government is paying on its borrowing surges. A row between the chancellor Philip Hammond and Theresa May is getting the blame.
The yield on UK government bonds is not high. If you were to go out and buy a ten-year treasury bond you would enjoy a yield of 1.12% (BST 7 am 18 October). Come to think of it, you wouldn’t ‘enjoy’ such a yield, rather you would be spitting feathers.
But maybe, if you had bought that same bond two months ago you would have been spitting out even more feathers, because at one point, in early August, the yield was just 0.52%. The recent rice is mildly good news for savers, but also means that the government pays a touch more interest on its debt. Mind you the effect is tiny. The average maturity on UK public debt is 17.74 years. It only pays this higher yield on bonds as they mature.
By contrast, if you look across the world, at say Germany or Japan, the equivalent bonds have barely moved over the last two months – although the yield on US bonds has gone up – but this has more to do with anticipation of an imminent rate hike.
Frankly, the recent jump in the yield on UK bonds is not going to shake the foundations of number eleven Downing Street.
A bigger concern relates to what might happen next, whether the yield will carry on rising, and indeed whether the pound will carry on falling.
The UK government is in the fortunate position that it borrows in its own currency, so at the last resort it can always pay debt by printing money.
But there is a relationship between bond yields and sterling. The government can in theory pay off its debt by printing new money but it is constrained by the currency market.
The pound has fallen again, many say this is a good thing. From the point of view of exporters, it is. But sterling is now undervalued. If you look at price purchasing parity, sterling is 15% too cheap. Take as example of this the so called Big Mac Index produced by the Economist. In the UK, right now, a Big Mac is cheap, relative to most developed countries.
It may feel like good news that the pound is giving exporters a terms of trade boost, but it is also telling us that the markets are worried.
As for number eleven Downing Street, the foundations may not be shaking over the rise in bond yields, but the removal vans may be coming around again soon. Its current resident, Philip Hammond, is known to favour a soft Brexit, and is opposed to the hard tone taken by senior colleagues. Rumours are now saying it may cost him his job.
Truth is, what the UK really needs is an open Brexit, in which it can emerge as a kind of Singapore to Europe a beacon of openness and free trade. But recent signals from the government suggests it is planning something quite different. That is the real reason why sterling is falling, and why bond yields are rising.