In the media we are bombarded with endless warnings about the “bond markets.” But despite the ominous-sounding headlines about rising yields, or Andy Burnham’s call for Britain to stop being “in hock” to them, it is rarely explained what the bond market actually is, or why it matters.
The ups and downs of the markets are treated like some sort of immutable law of nature, like gravity or natural selection. This sort of mystification is inherent to capitalism, and it serves a purpose for the ruling class: it makes these things seem like inevitable facts of life, which cannot be altered or overcome. But behind all these markets are real people, with their own vested class interests. By understanding how they work, working-class activists can be better prepared to fight back against those interests.
What Even is the Bond Market?
The bond market has not always held countries to ransom. However, for today’s modern, highly-financialised form of capitalism, it plays an important role for government spending. It does this by allowing the government to take on debt. Debt to who? To banks, financial institutions and individual private investors. Many insurance companies and pension funds also use this debt to finance themselves.
When the state needs to raise money, it gets investors to buy bonds. Back when bonds were exchanged in paper form, those from the UK Treasury traditionally came with gilded edges – hence the name “gilts”. Essentially, a bond is a promise of future money. The government tells investors, “lend us money now to finance spending, and we’ll be able to pay you back on a certain date.” When that date arrives, the bond is described as reaching maturity, and investors get their money back.
But capitalists have to make a profit – it is not enough to simply get back what they invested. So the bonds also come with a coupon – a promise of a fixed payment as a percentage of that gilt’s price. In other words, the government pays interest on the money it borrows. For example, a £100 bond with a 5% coupon would pay an extra £5 each year until maturity.
UK gilts are (in theory, anyway) seen as reliable long-term investments, unlike more volatile investments like stocks or cryptocurrencies. But gloomy prospects for the economy (in reality – the prospects for capitalists to make a profit in the UK) can spook investors.
If capitalists see better opportunities overseas, they might move their money elsewhere. If inflation goes up, that £5 coupon won’t go as far. If growth seems unlikely to keep up with growing debt, then doubts may emerge about whether the government can really keep its financial promises. This is why, when economic forecasts look bad, investors tend to sell off and cut their losses.
Gilts sold off below their original price find ready buyers on the bond market. For our gilt mentioned earlier, if sold at £80 rather than its £100 original price, our £5 annual coupon would represent more ‘”ang for your buck.” Rather than getting 5% back yearly, the speculator would get 6.25% back on their investment. This percentage – the rate at which the government pays interest on the bond, is what is called the yield on a bond. All this ends up creating an enormous web of investors exchanging IOU notes, a good example of what Marx called “fictitious capital” – effectively capitalists making claims on future wealth.
When investors sell off their gilts en masse, prices go down, and yields go up in proportion. Any new bonds they issue will then need to match that yield if they have any hope of finding a buyer. In other words, borrowing costs have gone up – because the government is expected to pay higher interest on its bonds.
The Bond Trap
At the height of the period of neoliberalism at the end of the 20th century, when the debt pile wasn’t as high and the economy was usually growing, governments had more ability to borrow. Today, the situation is much different. After the 2007/8 crash, the Bank of England bought up billions in gilts to help bail out the banks. The debt pile grew further under Covid, when massive state spending was once again called upon in order to rescue the capitalist system from oblivion.
UK government debt now stands at a whopping £2.9 trillion – almost 100% of GDP (the total value of goods and services produced by the country per year). And the government already forks out a fortune in paying the interest on this debt, equivalent to £111bn annually – that is 8.2% of all public spending just on interest payments! All this is money that is not spent on other areas.
What’s more, because GDP and productivity growth remain more or less flat, there are limits on the British government’s ability to promise “future wealth” to anyone. And to make matters worse, rising inflation following the Iran war’s disastrous effects on global trade means bond yields keep ticking upward, making borrowing costs even more expensive.
This bleak picture is why the government is desperate to avoid piling on more debt. It is also part of the reasoning behind Rachel Reeves’ (until recently Britian’s finance minister) infamous fiscal rules, which place the government in a self-imposed financial strait-jacket, requiring the budget to be in a “primary surplus.” This essentially means Reeves committing to the principle that tax revenues must exceed day-to-day public spending in all budgets.
Britain’s establishment politicians currently live in fear of so-called “bond vigilantes,” who sell off their bonds out of fear of “fiscally irresponsible” spending by the government. This risks raising the yield further, and deepening the hole. When Andy Burnham announced his intention to stand as Labour leader, even just the prospect that he might raise public spending was met with a sell-off of bonds. Burnham responded by seeking to reassure investors that he will respect the fiscal rules. He is clearly anxious to convince the capitalists that he would be a safe pair of hands for their system. Whatever his political will, this means that his ability to really reverse austerity and increase spending will be severely limited.
This whole situation is a sign of a sick system that is no longer capable of taking society forward. Following a period of stagnation and crisis in the 1970s, the ruling class looked to shore up its profits by attacking the working class, cutting taxes on the rich, and deregulating the financial system. This is why capitalism today has to rely more and more on debt to keep itself running. The interest the government pays on its debt means money pours out of the UK Treasury, right into the pockets of the super-rich. That is money that could be much better spent on socially useful projects. But instead, more than a million people sit on council house waiting lists, and schools and hospitals crumble. It is a stark illustration of the parasitic role the capitalist class plays today.
Can the Markets Be Ignored?
The markets may not be a law of nature, but that doesn’t mean they can simply be ignored either. An example of their power in recent years was under Liz Truss’ short-lived run as Prime Minister. She looked to fund massive tax cuts for the wealthy, financed in the short term by massive – and risky – government borrowing. The financial markets responded with a massive sell-off of gilts, and triggered a dramatic drop in the value of the Pound.
This posed the immediate risk of a financial crisis in Britain, and the threat of closures, layoffs and more cuts. Faced with this, the capitalist class moved against Truss, who was quickly deposed. Famously, her government expired more quickly than a lettuce with googly eyes livestreamed by the Daily Star. But this experience demonstrates the way the markets can function as a tool for the ruling class to keep government policy within strict limits.
This is also a warning to those on the left who look toward clever monetary tricks to avoid a confrontation with the capitalist class. Richard Murphy, an advocate of a school of economics known as Modern Monetary Theory (MMT), has proposed that the government refuse to raise borrowing costs, even in the face of a sell off. Instead, he says, the government could borrow directly, interest free from the Bank of England. The idea is that this would show that the government can dictate interest rates – they do not have to be dictated by the investors – and keep the bond markets at heel.
A courageous approach to facing down the capitalists would indeed be needed by any left government. But the problem is that Richard Murphy suggests this could be carried out successfully without challenging any of the fundamentals of the capitalist system. This would mean most of the financial system would remain in private hands and profit would remain the driving force in society. It is unlikely that investors, banks etc which rely on the returns from their bonds – nor the rest of the capitalists, who are deeply enmeshed with finance capital – would simply accept such a dramatic change at great cost to themselves.
Instead they would fight back aggressively. A left government taking this road would face threats of investment strikes and capital flight – where the capitalists pull their money and assets out of the country. Only by taking control of the banking system as a whole via nationalisation (without compensation for the super-rich), combined with measures like capital controls, could stave off the threat of an economic catastrophe. This would need to be accompanied by a mass mobilisation of the working class to begin taking control of their workplaces, and of society more widely.
Others, such as Gary Stevenson of Gary’s Economics, suggest that we should stop looking to debt to fund our spending, but instead tax the rich. Socialists certainly agree with the demand to take the wealth out of the hands of the super rich to fund the things we need. But similarly, there are limits on how much taxation the super-rich will tolerate. It is the balance of forces between the working class and billionaires which is the key factor determining how much they can be made to pay. Already, the wealthy successfully avoid and evade huge sums, and measures which are more stringently enforced can also trigger the same kind of economic sabotage by the capitalists described above.
The main obstacle these two approaches (both of which look to make capitalism work for ordinary people through reforms) come up against is the power of the capitalist class. The capitalists enforce their rule through the markets, as well as through institutions like the state and the Bank of England. Challenging the bond markets requires standing up to the whole capitalist system they rest on.
The Socialist Solution
The only way to control the wealth in society is to own it. That’s why socialists fight to nationalise the banks, pension funds and other major financial institutions, as well as the big corporations that dominate society – the so-called ‘commanding heights’ of the economy. This would be immediately necessary to prevent the super rich taking their wealth out of the country, shutting down production, or any other hostile measures to undermine or bring down a government that takes on the bond markets. It is also the first step to untangling the gordian knot of debt.
Bringing all the financial institutions – and their bonds – into democratic public ownership would turn much of the current debt into little more than money that a socialist government owes to itself. Interest payments could be restructured, and many of these IOUs essentially ticked off.
Pension funds and other genuine claims, as well as the massive investment needed in jobs, public services, transport and green energy, could instead be paid by using the wealth in society for public need rather than private profit – as well as directly by taxing the rich. Under a democratically planned economy, the idea of approaching the rich, cap-in-hand, asking for money would be totally redundant.
But a socialist government would face enormous hostility, not just locally but from capitalists overseas, who claim almost a third of UK government debt. This debt should be cancelled – a socialist government would have no interest in subsidising these vultures’ profits. Of course, such policies, which threaten the rule of the capitalists internationally, would also be met with threat of boycotts, sanctions and other measures. On the other hand, a socialist government could rely on the sympathy of the billions of people around the world currently kept in conditions of misery under the heel of this system.
The fight against capitalism would have to count on the support of the working class overseas to defend it – and ultimately to join in the fight to break with this system. That’s why the fight for socialist change in Britain is inseparable to the struggle for socialism around the world – and why Socialist Alternative organizes on an international scale.
The bond markets, and the financial system as a whole, are treated as natural features of society. In reality, they are one of the many ways that the capitalists maintain their profits and their power. Only by breaking the power of the capitalist class through socialist measures to take the economy into democratic public ownership will it be possible to begin investing in the things working-class people desperately need, rather than to stuff the pockets of a class of super-rich elites.
