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Mohamed A. El-Erian

UK Turmoil Spawns the Return of Bond Vigilantes

They won’t be satisfied with just Britain. Their presence is extending to Germany, Italy and emerging markets.

the Bank of England has had no choice but to intervene.

the Bank of England has had no choice but to intervene.

Photographer: Isabel Infantes/AFP/Getty Images

The turmoil in the UK bond market threatens not only the stability of the country’s financial system but also the economic and social well-being of most of its citizens. It is a situation that is going from bad to worse, and other countries must watch it carefully. Underpinning the recent disruption is the reemergence of the bond vigilantes — a debt-disciplining financial force that, long repressed, is starting to reassert itself.

The UK narrative is well known by now. A “government in a hurry” goes all out and promises not just protection from higher energy prices for both households and companies and growth-enhancing structural reforms but also large unfunded tax cuts. It does so in the context of a global increase in borrowing costs. Not surprisingly, markets push back strongly against the implied increases in the amount of debt, interest payments and debt-to-GDP ratio. The resulting sharp surge in yields exposes the significant fragility of a pension system that resorted to financial engineering to enhance returns.