The term premium is the message

The gilt market is where British macroeconomic credibility is priced every morning. It is not a morality play about 2022, though 2022 is still in the memory of every real-money account that had to sell. It is a market with a large stock, a still-large issuance programme, a central bank that is shrinking its holdings, and a global bid that has other places to go.

Term premia — the extra yield investors demand to hold duration — have been the quiet villain. Short rates can fall and long rates can stay high if the extra compensation for 10 and 30 years of British politics, inflation and supply does not compress. That is why “the Bank is done” and “mortgages will cheapen in a straight line” are not the same sentence.

Quantitative tightening is policy. Letting gilts roll off, and selling some, is a decision to put paper into the market. Combined with the Debt Management Office’s calendar, it means the private sector has to absorb more duration than it did in the QE years. Pension funds are not the one-way buyers they were when they were still closing deficits on a falling-yield trend.

International comparisons are used selectively in Westminster. On debt and deficit ratios, the UK is not the worst in the advanced-economy set. On the yield it pays, it has often been among the dearest. That gap is the risk premium. Closing it requires boring consistency: fiscal events that do not surprise, inflation that does not re-accelerate, and a political system that can pass a Budget without a week of briefing wars.

For households the chain is simple enough. Gilt yields feed swap rates, which feed mortgage rates, which feed housing activity, which feeds construction jobs. For the state the chain is simpler still. Higher yields feed debt interest, which feeds the next Budget, which feeds tax and spending. That is why this blog will keep a gilt essay next to the fiscal one. They are the same subject in two dialects.