Britain is an oasis of calm for bond markets compared to the US and France

As Labor moves to deliver on its ‘growth’ agenda, Rachel Reeves will be guided by one overarching idea. As a former Bank of England economist, she realizes more than most that her main star must be the formidable force of bond market watchdogs – investors who want to bully errant governments for their own gain.

If Liz Truss and her chancellor Kwasi Kwarteng had recognized this two years ago, it is entirely possible that Keir Starmer and Reeves could still be on the opposition benches.

Market-induced economic disasters are rarely forgiven by voters, especially if they sharply increase the cost of consumer loans and mortgages.

Reeves’ determination to hold the line on further public borrowing and debt-raising and the mantra that all manifesto promises must be “funded and accounted for” is no accident.

This is a stark financial lesson that France and the US should keep in mind amid their current election fever.

France’s far-right National Assembly party may believe the euro zone will provide a safety net, whether or not votes in the second round of parliamentary elections begin to be counted tonight.

As a result, he believes the country can deflect Truss’s wrath. There is no such guarantee, as the people of Greece will testify, who went through a terrible period of austerity after the debt implosion of 2008-2010.

Similarly, as Donald Trump’s star rises in the polls, amid horror at Joe Biden’s faltering mental capacity, US bond markets are being driven out of complacency.

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If U.S. bonds, known as Treasuries, take a hit, then the dollar and Wall Street stocks, buoyed by the inflated valuations of the “Magnificent Seven” tech stocks, could take a serious beating.

Shifting tectonic plates could trigger a global market crash.

The rich G7 nations, which have run up huge debts to pay for the Covid-19 lockdown, the energy crisis sparked by Russia’s war in Ukraine and bloated climate change subsidies, don’t have much of a safety cushion.

With the exception of Germany, all are sitting on piles of debt that are huge when compared to national performance.

Britain actually looks far less vulnerable to another bond market blowout than other countries heading into the election. Bond yields — the interest rate a government must pay to attract lenders and therefore a key gauge of how risk markets view debt as debt — are narrowing.

With inflation back at the two percent target, the Bank of England looks set to cut interest rates from the current 5.25 percent as early as next month.

The headline budget deficit – the difference between the government’s day-to-day spending and its tax revenue – is 1.4 per cent of national output in the UK, but an alarming 5 per cent in France.

Ratings agency S&P says the pressure on the Labor government to spend on crumbling public services and infrastructure is the “elephant in the room”.

But in France, the prospect of a Marine Le Pen-backed administration with a newcomer, 28-year-old prime minister Jordan Bardella, has indeed sent a chill through European bond markets.

President Macron tried to unite the opposition against the populist right. The price for his political maneuvering is a coalition that includes Jean-Luc Mélenchon’s radical far left, which espouses big-spending ideas.

Bardell’s own promise to abolish VAT on fuel would cost the French treasury almost £10 billion alone. In echoes of Jeremy Corbyn’s magic money tree, the National Assembly also promises to increase spending on social security, nationalize motorways and – in a nod to free market capitalism – cut income taxes.

Ahead of today’s election, the yield gap, the difference in yields between Germany’s benchmark bond and French bonds, widened by 0.7 percentage points.

This may just be the beginning. Shares on the Paris Stock Exchange – which for a time topped London’s in total market value – have fallen about 6 percent in the past week, in what could be the start of a collapse.

America is far from immune to a bond market disruption or an attack on a super-strong dollar. Republican administrations are generally believed to be better for public finances because of a fundamental belief in balanced budgets.

However, the swing in public opinion toward convicted felon Donald Trump since Biden’s failure in the Atlanta debate is causing consternation on Wall Street.

The yield on 10-year U.S. Treasuries rose to 4.5 percent on expectations of a Trump victory.

The wayward former president’s campaign pledges to impose tariffs on foreign imports, cut taxes and crack down on the Federal Reserve for keeping interest rates too high for too long are starting to sow global panic.

And this at a time when China, among other countries, is buying up all the gold it can get its hands on because it no longer wants to hold hundreds of billions of dollars of US Treasuries in its reserves.

Britain looks like an oasis of calm amid bond market turmoil in France and the US.

Indeed, several mortgage firms felt confident enough to lower the cost of fixed-rate mortgages on Election Day. Rightmove tracker shows the average five-year home loan falling below 5 per cent.

Despite the grim rhetoric, Starmer and Reeves find themselves in relatively benign markets. The big danger is that in an effort to pay for a bigger state, Labor will raise taxes so far as to kill the budding recovery.