Transcription
Hi, welcome back to Joe Blogs. In this episode, I want to talk to you about what's happening in the United Kingdom and specifically to talk about the ongoing bond crisis.
But before we get into that, I wanted to have a quick winge because I recently uploaded a follow-up video talking about what's going on with my investments. If you've been following me, you'll know that I've been posting videos about this artificial intelligence share platform that I've been using, picking out shares that I think are going to beat the market. I posted the latest update yesterday and YouTube deleted it and issued me with a warning and it's the first warning that I've had in the five years that I've been on YouTube. I was really quite annoyed about it. Still a bit upset about it now. Sort of put me off YouTube a little bit. Um, so I'm now looking at alternative options. So if anybody who's watching uses any of the other platforms, let me know what which ones you think are worth having a look at. And also if anybody hasn't subscribed yet, please do so now. And if you'd like to win this statue, then have a look in the link below.
Right, let's get on to what's happening with UK bonds because this week UK bond markets have taken a bit of a battering and the appetite for UK guilts, which are basically bonds issued by the UK government with a fancy name called guilts because they used to have guilt edges down the side of them 100 years or so ago, has been the lowest for a number of years. If we have a look at this chart, it shows the demand for 30-year bonds. Uh there was a auction recently, this week, for around 4.75 billion of UK 30-year guilts. And as you can see from the black line here, demand has been falling since the first part of 2024. and the demand fell to a level that was the lowest for 2 years now. It was still overs subscribed. So, we're not at the point where the UK government is uh having to go to the IMF and seek a bailout because they can't raise any finance themselves. But the trend here is really important. When you look at a trend like this in such a big market as UK guilts, it tells us that investors are wary about what's happening in the UK and they're not as interested as they used to be.
And it's not just 30-year bonds that are suffering. This is the chart for the 5-year bonds, which are generally the the best in terms of demand because you only have to lock in for a 5-year period. And you can see a similar sort of story here that demand in the most recent auction was actually down to its lowest level since the beginning of 2024. So, there's definitely some problems that are bubbling around at the moment.
And if we look at what's going on with the yield on 30-year guilts, you can see that the current yield, this is what the UK government had to pay to get those bonds away, it's up at 5.5%. Which is pretty much the highest that it's been at any point in the last 12 months. But actually, if we expand the scale of this chart to show what's been happening over the last 10 years, you can start to see the problem. Because at 5.5% that rate is hugely above where it's been for the last 10 years. 10 years ago the UK government was paying around 2.5% for those bonds. So as and when all the old bonds are maturing, they're having to repay those bonds with new bonds being issued at much higher rates, two or three or even four or five times higher. Because if you look at what happened in between 2020 and 2022, the rate was down at one point it was down at less than 1%. So this is the problem that's building for the UK government that their debt is becoming significantly more expensive.
So that's an issue and it's not just on the 30-year money, it's also on the 5-year money. If you look at the most recent auction, it was placed at 4.1%. And if we look at the last 10 years, you can see a similar story. 4.1% is significantly higher than the UK government has been paying on those 5-year bonds. And of course on a 5-year bond, if you look at 2020, the bonds that are being issued today are repaying the bonds that were issued in 2020 because the UK government doesn't have any money to repay those bonds. What it really does is issue a new bond and then use the capital raised from the new bond to pay off the the old bond. And the old bonds five years ago were being issued at 0.2%. Some of them were actually being issued at 0%. So the increase in the cost of borrowing is absolutely huge from the UK government's perspective. And this is just like you getting yourself into debt and that debt constantly becoming more and more expensive. And if you can't afford to pay it, then it just keeps escalating. And that's the problem at the moment.
And if we look at this table, I thought it was worth having a look at who the buyers of UK government bonds are. And they're split into a number of different categories. Now, the APF is actually the Bank of England's quantitative easing. So, this is basically the Bank of England buying bonds from the UK government. So, it's left pocket, right pocket really in terms of they're all part of the wider government setup. And APF stands for asset purchase facility. We've then got a bunch of overseas investors. So, this will be overseas governments and also overseas institutions that are wanting to buy into UK government bonds. We can then have insurers and pensions, banks and building societies, other financial institutions, and then a whole host of others. And you can see in 2015 the total amount of UK government bonds that were being held were about 1.6 trillion. And the biggest holder back in 2015 were insurers and pensions. We'll have a look at the percentages in a moment. If we now look at 2024, where we are right now, the total amount of debt has ballooned to 2.5 trillion. And interestingly, the biggest single holder in 2024 are overseas institutions.
And if we have a look at the percentage breakdown of that, back in 2015, insurers and pensions were holding 30% of all government bonds. The next biggest holder were overseas investors at 28% and then the Bank of England at 23%. Now if we have a look at what happened with the Bank of England, I think this is an interesting story because as we went through the global pandemic, the Bank of England had to take measures to try to stimulate the UK economy because interest rates were reduced to virtually zero and that wasn't working. So the only other way of doing that from the Bank of England's point of view was to inject money into the economy, quantitative easing as it's called, which basically it does by buying UK government bonds. So you can see that in 2020 the percentage held by the Bank of England increased to 32% and then that rose to 33% in 2021 and 2022. Now over the last couple of years the Bank of England has started the opposite program called quantitative tightening where it's now selling those bonds. So its holdings are now down to 24% which is broadly in line with where it was back in 2015.
Now, interestingly, the overseas holders has increased from 28% to 32%. But I think one of the fascinating things about this chart is what's going on with the insurance companies and pension funds because historically they bought government debt because firstly it was seen as being very safe and secondly it was quite lucrative. But as you can see the percentage held by those institutions has fallen from 30% to 21%. There's a couple of reasons for that. Firstly, the risk has gone up. The UK government is no longer as safe as it was 10 years ago. So, it's the risk-reward profile has changed. And also, the yield on those bonds isn't as good because as we've talked about, we've seen the price of bonds going down, which has been pushing the yield up. And of course, the insurance and pension funds have been sitting on lots of these for a long period of time. So they're having to mark down the value of all their existing holdings. They're not just buying new bonds every single year. They're sitting on the majority of these bonds for 10, 15, 20, 30 years at a time. And so all of the existing portfolio is going down in value and that's bringing down the returns for those funds and insurance companies. So it's not as attractive to them anymore. And that's a problem for the UK government because they are a rock solid buyer historically. And that's one of the reasons why demand for UK bonds is now going down because one of the biggest cornerstone investors isn't as interested in buying it anymore.
And one of the reasons why the risk has increased on UK government bonds is because the deficit that the government is running is getting larger. The latest statistics for August show that the month of August produced a deficit of 18 billion pounds. That's almost 25 billion. So in the month of August, the UK government spent 18 billion more than it received in all of its income, which is mostly from taxes. And that was well above the forecast level of 12.5 billion, almost 50% higher in the month alone. And the deficit so far in the first five months because the UK has a tax year that ends on the 5th of April. So the first five months of the new tax year, the deficit is running at just under 84 billion pounds, which is 11.4 billion higher than the OBR forecast and the second highest since records began in 1993. And the only other year that was higher was the pandemic in 2020, which obviously was a complete exception.
And what that means for the UK government is that the cost of its debt is ballooning. We talked about the rise in yields and the fact that the UK government is issuing more debt, but interest payments in August were 8. Which is 1.9 billion than it was in August 2024. So the debt cost is rising and the total so far this year of 49.9 billion is close to the size of what the UK is investing into defense in the year. So that really puts into perspective the UK is now already in the first 5 months paying as much in interest than it's going to invest into defense which when you think about the two what what the value you're getting from both of those obviously you don't get any value from debt interest and defense is quite an important topic at the moment and public sector debt is now sitting at 96.4% 4% of GDP which is.5 percentage points higher than it was a year ago and is at levels not seen since the early 1960s. So these are the reasons why institutions are becoming more concerned and less interested in UK government bonds.
And if we have a look at this chart, it shows what's going on in graphical form. So we've got a bar chart here which shows the cumulative net borrowings. So this is basically the debt figure and you can see that it's risen in every single month so far this year. And the current 83.8 billion is higher than it was expected to be. And if we have a look at the two line charts here, they show the size of the deficit. How much the UK owes the amount that it's spending is more than the amount that it's earning. The black line shows the deficit for last year and the purple line shows the deficit for this year. So you can see that the deficit is running above last year so far this year. Now the forecast by the OBR is that it's actually going to come in at a lower figure. It's expecting the deficit to reduce to 117.7 billion by the end of the year. Well, that would be significantly less than the 146 billion from last year. However, how is that going to happen? Because what we're seeing at the moment is spending is outstripping the income for the government. So the only way that the government could turn this around would be by introducing a huge amount of taxation in the November budget. And whether or not they will do that and whether or not that will then impact on GDP and have serious implications for the economy remains to be seen.
So what's the summary and conclusion today? Well, I wanted to post this video because we've been talking about the UK and the UK economy and what's going on with bonds over the last couple of months. And what we've seen in today's video is that the situation continues to get worse. The reason why it's getting worse is because the UK government continues to spend more than it's earning. So, it's creating a deficit every single month. And that deficit means that it's having to issue more bonds to take on more debt to finance everything that it's paying for. Those bonds are becoming more expensive. So, we've seen where the yields are sitting compared with the long-term average. That means that the UK is now spending more than it wants to on interest and those interest charges are rising every single month. So this is putting further pressure onto the budget at a time when Rachel Reeves, the chancellor of the exchequer, had said before she started when she took over, she said that she would finance all of her spending directly from income by the end of 2030. Now, as it's sitting at the moment, it looks very unlikely that that is going to happen. In fact, it's going in the opposite direction. The government is spending more than it's earning and that deficit is increasing every single month which is building up on the debt burden.
And as a result of these factors, UK government bonds guilts are no longer as attractive as they used to be. We saw the data from the most recent auctions which showed that the amount of bids are down to the lowest level for two or 3 years depending on which of those guilt markets you're looking at. And what that tells us is that the UK government is going to have to keep offering premiums on the yields. It's going to have to keep pushing up the price of the debt to encourage holders to take on that debt. That will further add to the debt burden, further add to the interest costs and is going to add further problems for the UK economy and the chancellor of the exchequer. So I think all of this is building up to a really interesting budget at the end of November and we are going to see some serious tax hikes coming in that budget if Rachel Reeves and the UK government are going to have any chance of narrowing that deficit and coming in anywhere near the original figures that were forecast for this year.
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