This is an audio transcript of the FT News Briefing podcast episode: ‘Bond vigilantes target government spending’

Kasia Broussalian
Good morning from the Financial Times. Today is Friday, January 10th, and this is your FT News Briefing.

Brussels is trying to predict which US policies Donald Trump will undo. And concerns over high government debts have sent bond yields through the roof. Plus, what’s up with Elon Musk trying to unseat the UK prime minister? I’m Kasia Broussalian and here’s the news you need to start your day. 

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Officials in the European Union are taking stock of all of the executive actions US President Joe Biden has signed. They’re worried that president-elect Trump might reverse them all. And that could have major implications for the bloc. Some of the decisions include things like sanctions against Russia for its war in Ukraine. Revoking those would mean losing a lot of leverage in any sort of future peace negotiations with Moscow. Only US presidents have the power to issue executive orders, and they can be rescinded at any time. So the EU is scrambling to get a grip on what might be coming before Trump is sworn into office later this month.

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Bond markets in a handful of big economies are in a tailspin. Major sell-offs in places like the US, UK and France have sent borrowing costs soaring, and the people driving these moves are government bond investors. Some are even seeing the return of so-called bond vigilantes, as my colleague Ian Smith has been writing about. 

Ian Smith
A bond vigilante is a term used to describe the bond market when investors force borrowing costs higher in order to apply pressure on governments to tighten the government finances. 

Kasia Broussalian
Ian’s with me now to talk about it all. Hey, Ian. 

Ian Smith
Hey. 

Kasia Broussalian
So what’s behind the sell-off we’re seeing now in places like the UK, France and the US? What are bond investors so spooked about? 

Ian Smith
So we’ve seen government bond prices falling, so pushing up yields for some months now as investors change their expectations for inflation, thinking inflation is gonna be more stubborn and the central banks are going to be slower to cut interest rates than they would have been previously. But that has been exacerbated and borrowing was forced higher In countries where investors are becoming more negative about the fiscal situation or the level of borrowing. And these are economies that come from a starting point of high debt and are planning to borrow more in order to kind of support spending plans or tax cuts. So that’s adding to investors’ nerves. 

Kasia Broussalian
Yeah. What sort of message are the bond vigilantes trying to send by forcing up borrowing costs? Is it kind of like, hey governments, rein it all in? 

Ian Smith
I think the message they’re sending is that governments are already indebted with high debt to GDP. They also have deficits that are in some cases worsening and they have plans to increase spending to support their economies. So investors are sending the message that they’re concerned about extra borrowing that’s gonna be used in all these kind of fiscal policies. And how much of that can be suggested by the market and whether these economies need to be put on a firmer footing? 

Kasia Broussalian
It’s kind of like the government bond market is acting as the grown-up in the room. Is that how you see it? 

Ian Smith
That’s certainly how one investor put it to me. And to some degree, bond investors have always played this role. Bond vigilantes is a term that was coined back in the 1990s in the US, where bond investors managed to force change in government policy. And from time to time, people invoke this term and then they debate whether really the bond vigilantes are back in any meaningful way. But we’re certainly seeing with some of the scale of the yield moves, people having more of that conversation. So UK 30-year borrowing costs have hit their highest since the late ‘90s, the 10-year, the highest since the financial crisis. And in France, you’ve seen that spread of their government debt and their government borrowing costs against Germany’s, reaching its highest since the Eurozone crisis. So we’re starting to come to levels where people are saying the bond market is applying pressure to policy. 

Kasia Broussalian
But I’m still curious about the timing here, because governments, you know, they’ve been indebted for quite a while now. 

Ian Smith
One reason that you’re seeing these moves now is that central banks who have bought vast amounts of government debt are now reducing their balance sheet holdings. And then also China is reducing its stock of foreign debt. So you have no longer got that buyer on one side of the ledger that is muting some of this price reaction. So that’s why you’re seeing borrowing costs that can really rise because those yields are no longer being held down by vast buying. 

Kasia Broussalian
And are there any indications that this most recent group of bond vigilantes will be successful in actually influencing government policy? 

Ian Smith
I think the jury’s out on that one. At the level of political discussion, certainly, during the France political crisis last year, the market reaction was a big part of the political debate. And what could actually be accepted by the markets was part of the conversation there. In the UK, where the memory is still fresh of the 2022 ill-fated mini-Budget of the government of Liz Truss, the UK government in the October Budget was very alive to this potential market reaction. And on Thursday, the UK Treasury sent out its number two to address MPs on these surging borrowing costs. So clearly they’re taking it very seriously. In the UK, some think the chancellor will have to act to reduce spending now that higher borrowing costs threaten her self-imposed fiscal rules. 

Kasia Broussalian
Ian Smith is the FT’s senior markets correspondent. Thanks, Ian. 

Ian Smith
Thank you. 

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Kasia Broussalian
The wildfires burning across Los Angeles could lead to as much as $20bn in insurance losses. That’s according to early estimates from analysts. Tens of thousands of structures are at risk of being destroyed. And in addition to the scale of the fires, some of the affected areas are pretty wealthy, and so they have high property values. The losses could make the already expensive home insurance market even more unaffordable for Californians. Several companies have stopped selling new home insurance policies in the state. They say regulations prevent them from raising prices enough to cover these wildfire losses.

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Elon Musk is trying to get rid of British Prime Minister Keir Starmer. The world’s richest man is looking to throw his support behind the right-wing Reform UK party. And he wants to know if there’s a way to force a change in prime ministers before the next election. This all stems from a scandal over child sexual abuse in the north of England more than a decade ago. Here to explain is the FT’s Anna Gross. Hi, Anna.

Anna Gross
Hi there.

Kasia Broussalian
So first of all, can you explain what happened in this scandal in 2013? 

Anna Gross
Yeah. So this was a scandal that erupted in the early 2010s, and it was around mostly girls in northern cities in England who were being groomed and sexually exploited and even raped by gangs of men who are mostly of Pakistani descent. It was a really, really gruesome period and it got a huge amount of attention at the time. For the latter parts of that, Starmer was director of public prosecutions, and so Elon Musk and others have kind of leapt on that to say that he’s culpable, that he in some way allowed this to happen. The reality is that in some of the kind of most egregious cases, there’s actually no evidence at all that he was made aware of them in those early months, that he was director of public prosecutions. And also people who worked in law enforcement said that he was instrumental in bringing people to justice later on during his tenure as director of public prosecutions. 

Kasia Broussalian
But what’s curious to me is, like you mentioned, this was covered a lot during the time period that it was happening. So why is Elon Musk bringing it all up now? 

Anna Gross
There are many different factors, but one of them is that there is a kind of prevailing narrative amongst right-wing thinkers, and that’s in the US, in Europe, that society is kind of falling apart. And a big part of that is mass migration. It’s globalisation. It’s been written about recently and I think Musk spends a hell of a lot of time on his own platform — on the platform that he bought, X — and part of the way that the algorithm works means that he’s constantly being fed this kind of material that he believes and he supports because that’s how it works. And so I think there’s an increasing evidence that he’s actually being radicalised by the mechanics of his own platform. 

Kasia Broussalian
Radicalised by his own platform. That’s interesting. Now, getting back to Keir Starmer, how does Musk think he can actually replace him? 

Anna Gross
Look, Musk has made no secret of the fact he does not support Labour, and he’s been kind of probing around about how it might actually be possible to unseat Sir Keir Starmer. I think it’s very unlikely. Labour has a 170-seat majority in Parliament, a very, very sizeable majority. You know, there have been cases where prime ministers have had to step down in the middle of a parliament because popularity has waned so much. But actually what we’re seeing with Labour at the moment is quite a good degree of loyalty from MPs. So I really don’t see that happening any time soon. 

Kasia Broussalian
All right. So it sounds like Musk is probably not going to be able to replace Keir Starmer. But overall, just how much impact could he have in British politics? 

Anna Gross
Well, I think the reality is that he could have an absolutely huge impact. His onslaught of tweets over the past week have had an enormous impact on political dialogue. I mean, they’ve dominated front pages. It’s led to an amendment to a piece of legislation being put forward. And then the second thing is his financial backing could be transformative. You know, there’s been talks about him potentially donating tens of millions to the kind of smaller start-up party called Reform UK. Money like that could essentially, you know, build the party up so that it becomes a real contender. 

Kasia Broussalian
Anna Gross is a political correspondent for the FT. Thanks, Anna. 

Anna Gross
Thanks so much. 

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Kasia Broussalian
You can read more on all of these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news.

The FT News Briefing is produced by Niamh Rowe, Fiona Symon, Sonja Hutson, Lulu Smyth, Mark Filippino and me, Kasia Broussalian. Our engineer is Joseph Salcedo. We had help this week from Sam Giovinco, Breen Turner, David da Silva, Michael Lello, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.