It all seemed so easy, but then along came Italy and Cyprus

Bond yields: watch out for the great rotation.

Watch out for the great rotation was the ubiquitous catch phrase as we entered 2013. Bond yields had become absurdly low, in many cases negative, in real terms. Equities were fairly valued and, with the major central banks of the world printing money like "no tomorrow", inflation would soon take off, reducing bond markets to rubble, whereas stocks would offer good inflation protection. What could go wrong-buy equities and sell bonds?

It all seemed so easy, and by the end of January it all looked fine and dandy-equities were duly perky, and ten-year US Treasury yields had climbed over 2 per cent, from around 1.75 per cent at the end of 2012. Then, in February and March, along came Italy and Cyprus.

Italian elections lead to complete impass and raised the possibility that back-tracking on fiscal reform would rear its forbidden head, and worse, it seemed likely that Eurozone policymakers were about to fire both barrels at their own feet, to paraphrase Dutch Finance Minister Dijsselbloem, using the Cyriot confiscation of bank depositors’ money as a ‘template’ to dress the balance sheets of Europe’s weaker banks. This all lead to a flight to safety in US Treasuries, so yields fell back again, their descent hastened by weak US employment figures.

But now the landscape has changed again with the Bank of Japan’s, (BOJ), incredibly aggressive new quantitative easing policy-much bigger as a percentage of GDP than the US Federal Reserve’s programme. There is finally a chance that the Japanese economy will rise from 20 years of slumber, but there is also a great risk that other major central banks be unable to resist the peer group pressure to emulate the BOJ, by ramping up the scale of their own money printing. Hardly a world conducive to lower bond yields, maybe not even in Japan if the government and BOJ are successful and reach their 2 per cent inflation target.

The US economy is already on a relatively robust recovery path, with an enormous corporate cash mountain about to be put to work in investment, now that the imagined dangers of fiscal cliff, debt ceiling and sequestration are receding, and the Eurozone political masters patently just as fanatically committed as ever to ensure the Euro’s survival. US animal spirits will make this soft patch very short and soon the down-leg for the bond market will resume in earnest.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Photo: Getty
Show Hide image

Why Chris Grayling is Jeremy Corbyn's secret weapon

The housing crisis is Labour's best asset - and Chris Grayling is making it worse. 

It feels like the classic Conservative story: wait until the election is over, then cancel spending in areas that have the temerity to vote Labour. The electrification of rail routes from Cardiff to Swansea – scrapped. So too is the electrification of the Leeds to Manchester route – and of the Midland main line.

But Crossrail 2, which runs from north to south across London and deep into the capital's outer satellites, including that of Transport Secretary Chris Grayling, will go ahead as planned.

It would be grim but effective politics if the Conservatives were pouring money into the seats they won or lost narrowly. There are 25 seats that the Conservatives can take with a swing of 1 per cent from Labour to Tory, and 30 seats that they would lose with a swing of 1 per cent from Tory to Labour.

It wouldn’t be at all surprising if the Conservatives were making spending decisions with an eye on what you might call the frontline 55. But what they’re actually doing is taking money away from north-west marginal constituencies – and lavishing cash on increasingly Labour London. In doing that, they’re actually making their electoral headache worse.

How so? As I’ve written before, the biggest problem for the Conservatives in the long term is simply that not enough people are getting on the housing ladder. That is hurting them in two ways. The first is straightforward: economically-driven voters are not turning blue when they turn 30 because they are not either on or about to mount the first rungs of the housing ladder. More than half of 30-year-olds were mortgage-payers in 1992, when John Major won an unexpected Conservative majority, while under a third were in 2017, when Theresa May unexpectedly lost hers.

But it is also hurting them because culturally-driven voters are getting on the housing ladder, but by moving out of areas where Labour’s socially-concerned core vote congregates in great numbers, and into formerly safe or at least marginal Conservative seats. That effect has reached what might be its final, and for the Conservatives, deadly form in Brighton. All three of the Brighton constituencies – Hove, Brighton Kemptown and Brighton Pavilion – were Conservative-held in 1992. Now none of them are. In Pavilion they are third, and the smallest majority they have to overcome is 9,868, in Kemptown. The same effect helped reduce Amber Rudd’s majority in Hastings, also in East Sussex, to 346.

The bad news for the Conservatives is that the constituencies of Crawley, Reading, Swindon and in the longer-term, Bracknell, all look like Brightons in the making: although only Reading East fell to Labour this time, all saw swings bigger than the national average and all are seeing increasing migration by culturally-driven left-wing voters away from safe Labour seats. All are seeing what you might call “Hackneyfication”: commuters moving from inner city seats but taking their politics with them.

Add to that forced migration from inner London to seats like Iain Duncan Smith’s in Chingford – once a Conservative fortress, now a razor-thin marginal – and even before you add in the appeal of Jeremy Corbyn’s person and platform, the electoral picture for the Conservatives looks bleak.

(It should go without saying that voters are driven by both economics and culture. The binary I’ve used here is simplistic but helpful to understand the growing demographic pressures on the Conservatives.)

There is actually a solution here for the Tories. It’s both to build more housing but also to rebalance the British economy, because the housing crisis in London and the south is driven by the jobs and connectivity crisis in the rest of the United Kingdom.

Or, instead, they could have a number of measures designed to make London’s economy stride still further ahead of the rest, serviced by 5 per cent mortgages and growing numbers of commuter rail services to facilitate a growing volume of consumers from London’s satellite towns, all of which only increase the electoral pressures on their party. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.