For stockpickers, the world of bonds can be mystifying. Take sell-offs. When equity markets fall, it’s often painted as the product of raw psychological impulse. By contrast, when bondholders sell, it’s either out of cold, mathematical rationalism, or a desire to intimidate an issuer.
Indeed, as we are constantly reminded, it is the gilt market – rather than voters or ministers – to whom the chancellor must ultimately answer. In the world of government debt, buyers’ willingness to stomach a fiscal programme represents a hard market reality. And unlike many publicly listed companies, governments’ need to constantly refinance means they cannot just draw the curtains and ignore prices.
This dynamic explains a good deal of our economic impasse. Despite plenty of arguments to the contrary, there are no easy ways to appease bondholders’ desire for near-term austerity and spending restraint and the long-term economic growth and credit stability that we all want. Venture capitalists may have done very well by rewarding the inverse mindset – growth-focused cash-burn today, grown-up financial controls tomorrow – but that’s because they spread risk across multiple high-risk bets. Government bond issuers don’t have that luxury.