LONDON (Reuters) – Whether Brexit purists or radical socialists win Britain’s election next month, a deluge of fresh debt is set to bloat the country’s 1.6 trillion pound ($2.1 trillion) government bond pile.
In 2010, Bill Gross – then cast as “king of the bond market” – warned that British government bonds were “resting on a bed of nitroglycerine” because of Britain’s large budget deficit.
Since then, however, demand for gilts – named after the gold-edged paper on which they were first printed – has risen as investors with huge liabilities, such as pension funds, sought the safety of reliable borrowers. Britain, the world’s fifth-biggest economy, has never defaulted.
“You have a big imbalance globally between the demand for safe assets and the supply of safe assets,” said Andrew Balls, chief investment officer for global fixed income at Pacific Investment Management Company (PIMCO).
PIMCO, which Gross co-founded, is the world’s biggest bond manager, with $1.9 trillion under management.
“In this kind of environment, you’re less likely to have a big bond market reaction to promises in terms of fiscal policy,” Balls told Reuters.
There is no consensus among investors on how much extra British debt would be too much. What is clear is that Britain’s bond market is about to get bigger.
Prime Minister Boris Johnson, whose Conservative Party leads opinion polls, has promised to increase public spending to levels not seen in Britain since the 1970s, a break from the party’s decade-long focus on fixing the public finances.
The opposition Labour Party, under its socialist leader Jeremy Corbyn, has promised an even bigger increase in spending as part of an “irreversible shift in the balance of power and wealth in favour of working people”.
British government borrowing costs remain close to record lows, with the 10-year bond yielding 0.75%, in part reflecting a bond market view that a Labour majority government is unlikely.
ON A GILT TRIP
Britain has more leeway to rack up debt than some of its peers.
Its overall debt as a share of economic output stood at 87% in 2018, more than double its level before the 2008-09 financial crisis but below France’s 98% and the United States’ 104%, according to the International Monetary Fund.