What caught my eye this week.<\/em><\/p>\n T<\/span>he first few days of a new year are often an anti-climax. It turns out the problems we had last year aren\u2019t magically wiped away by how human beings decide to formally turn a page.<\/p>\n However this time there\u2019s d\u00e9j\u00e0 vu in the mix too. Because early 2025 has a distinct end of 2022 vibe.<\/p>\n Yes, bonds are selling off \u2013 and people are writing mean things about central banks and a UK chancellor again.<\/p>\n In fact, earlier in the week it was being framed with straight-up Truss-talk \u2013 another UK gilt crisis.<\/p>\n It\u2019s true the UK is somewhat uniquely placed for bullying, being so enfeebled.<\/p>\n But rising yields are global, even if pundits in every country have tried to spin the rise in borrowing costs as their nation\u2019s own special curse.<\/p>\n Here we\u2019re blaming Rachel Reeves\u2019 tax-raising and spending budget.<\/p>\n In the US people point to incoming Trump tariffs and a government deficit in the trillions continuing to add to its planet-sized national debt \u2013 as well as a growing conviction that inflation isn\u2019t quite licked.<\/p>\n But yields are up in Europe too \u2013 in the EU and outside of it.<\/p>\n For example in Romania \u2013 where the ten-year yield is nearing 8% \u2013 I suppose they\u2019re blaming their own barmy strongman<\/a> moment.<\/p>\n As often happens with bonds, trouble was brewing for months before it landed on the front pages.<\/p>\n Financial nerds (guilty) were especially worried by the unusual development illustrated in this graph:<\/p>\n As Torsten Slok at Apollo<\/a> wrote when he posted it:<\/p>\n The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting.<\/p>\n<\/blockquote>\n By the end of the week \u2013 when the US posted a surprising high \u2018jobs number\u2019 that showed the economy was firing on most cylinders \u2013 the consensus was that the \u2018terminal rate\u2019 was going to end up higher, and that this was what the clever market had already discounted.<\/p>\n The \u2018terminal rate\u2019 is just bond-wonk talk for where they expect rates to end up for the five minutes when everything is in balance, before the next crisis strikes and central banks have to act again.<\/p>\n Six months ago everyone was looking forward to multiple rate cuts from the US Fed. And many were still wondering where the long-promised recession had gone.<\/p>\n So yields seemed dead set to fall.<\/p>\n But looking at markets now, I\u2019d be surprised if even the one Fed cut still expected comes to pass this year.<\/p>\n Of course, saying \u201cyields are up because the terminal rate is higher\u201d<\/em> really just palms off the question of \u201cwhy?\u201d<\/em><\/p>\n As does another bit of bond jargon that I think is relevant \u2013 the \u2018term premium\u2019.<\/p>\n This term premium is basically the extra return you\u2019d expect and demand for buying long-dated bonds instead of short-term bonds.<\/p>\n But without getting into the weeds \u2013 and knowing full well that some readers will confidently declare they know exactly what it is in our comments \u2013 let\u2019s just say the term premium is a bit controversial.<\/p>\n That\u2019s because it involves estimates of risk, not simple maths. (Some people even deny it exists!)<\/p>\n The sober way to assess the graph above is to say that the US economy is much stronger than was expected, inflation has been largely dealt with but is still over-target for the usual laundry list of reasons, and that Trump will cut taxes, boost growth, and continue to add to the US national debt.<\/p>\n However I\u2019m minded to agree with economist\u00a0Paul Krugman, who speculates there may now be \u201can insanity premium on interest rates\u201d.<\/em><\/p>\n Krugman writes<\/a>:<\/p>\n Look at the dynamic over the past few days.<\/p>\n Jeff Stein of the Washington Post reported that people around Trump were planning a fairly limited, strategic set of tariffs rather than the destructive trade war against everyone Trump has been promising; Trump quickly responded with a Truth Social post calling the report \u201cFake News\u201d and declaring that he does too intend to impose high tariffs on everyone and everything.<\/p>\n In short, Sources: \u201cTrump isn\u2019t as crazy as he looks.\u201d Trump: \u201cYes I am!\u201d<\/p>\n Then, as if to dispel any lingering suspicions that he might be saner than he appears, Trump held a press conference in which he appeared to call for annexing Canada, possibly invading Greenland, seizing the Panama Canal and renaming the Gulf of Mexico the Gulf of America.<\/p>\n This morning CNN reported that Trump is considering declaring a national economic emergency \u2014 in a nation with low unemployment and inflation! \u2014 to justify a huge rise in tariffs.<\/p>\n<\/blockquote>\n Like any economist Krugman has been wrong about plenty of things, but I think he\u2019s on the money here.<\/p>\n I\u2019d even argue there\u2019s some kind of Stockholm Syndrome thing going on in US politics at the moment, which has reached across the pond to us too.<\/p>\n A man who early last year was found guilty on 34 counts of falsifying business records to disguise hush money payments to a porn star has been re-elected as President for a second term.<\/p>\n You may recall the headlines:<\/p>\n Trump is the first ex-president to be sentenced for criminal conviction.<\/p>\n Yet this week he wasn\u2019t given anything for his crimes \u2013 basically because<\/a> he\u2019s about to be a President again and nobody wants a fuss.<\/p>\n No fuss, like, say, that we saw four years ago when his followers run rampant through one of the US government\u2019s most important buildings and multiple people died:<\/p>\n If you think this is all normal then good luck to you.<\/p>\n Indeed even if you\u2019re one of his Poundshop fans stirring up trouble on social media this week \u2013 someone whose knowledge of history doesn\u2019t seem to extend beyond The Battle of Britain \u2013 then you have to admit that for good or ill, things seem to be \u2018in play\u2019.<\/p>\n Just since Krugman\u2019s recap we\u2019ve had the MAGA wing blaming the L.A. fires on excess wokeism. As opposed to, say, last year being the hottest globally since records began due to human-induced climate change.<\/p>\n And now I read Peter Thiel opining in the FT<\/a> and calling for a Truth and Reconciliation process in which US state secrets are declassified by Trump to the world because \u201cthe Internet won\u201d<\/em>.<\/p>\n Meanwhile Trump\u2019s best-buddy and backer Elon Musk is getting stuck into politics here, in Germany, and elsewhere. And the same faction of Tories who clutched their pearls when Obama suggested Brexit didn\u2019t make a whole lot of sense eagerly leapt up with their tails wagging and teeth drooling when this foreign master called.<\/p>\n You can obviously see my biases here \u2013 but it is all relevant for the bond market.<\/p>\n In the first Trump presidency we saw yields roiled by his random Tweets. Such uncertainty has a cost.<\/p>\n In short, bond holders want more of a return when they\u2019re hostage to a self-proclaimed revolution, and I am pretty sure that\u2019s reflected in the escalating term premium<\/p>\n US bonds matter because they act like gravity on yields around the world.<\/p>\n If you can get 5% on 20-year US Treasuries \u2013 which you now can \u2013 then it\u2019s harder to justify owning say European government debt on lower yields, let alone that of an emerging-emerging market like the UK.<\/p>\n The UK 30-year gilt yield is now 5.4% \u2013 up from a yield of 5.1% when we sang Auld Lang Syne<\/em> and just 4.3% back in September.<\/p>\n That\u2019s a huge move.<\/p>\n Mostly this reflects rising yields across global bonds, but the UK does seem to be getting it a bit worse.<\/p>\n Sure, the Budget<\/a> won\u2019t have helped. I didn\u2019t like Labour\u2019s anti-growth tax on business either.<\/p>\n True, blaming the new Labour government for coming clean on the mess left by the previous 10-plus years of unavoidable events \u2013 Covid, Ukraine \u2013 and witless self-harm \u2013 the ongoing cost of Brexit, which more or less covers the spending gap Reeves is trying to fill \u2013 seems to me like chastising the parents who are cleaning up a ruined house after a teenage party goes viral on Facebook<\/em>.<\/p>\n But that\u2019s democracy. He or she who who\u2019d wear the crown must drink from the poisoned chalice.<\/p>\n And on that note \u2013 not incidentally \u2013 we have Nigel Farage and Reform waiting in the wings and polling a 20% share of the popular vote.<\/p>\n When you consider the best that can be said about Brexit is house prices didn\u2019t immediately crash \u2013 but absolutely nothing good came of it, not even the all-important fall in immigration \u2013 then you can see the problem.<\/p>\n As in the US, some people are still voting with their hearts and feelings, not their heads.<\/p>\n In such a climate anything can happen. And with UK government borrowing now looking like rising and becoming more costly to service even with grown-ups in charge, I can well understand why a bond holder would want more return for holding a 20-year bond baby.<\/p>\n (Bigger picture: how\u2019s your bug-out emergency plan coming along?)<\/p>\n With all that out my system, let\u2019s also admit higher yields are about inflation expectations, as I said.<\/p>\n True, this is undoubtedly linked to politics too. The timing in Torsten\u2019s graph above makes that clear. Non-token tariffs and mega-deportations would cost the US economy, and hurt the rest of us too.<\/p>\n But just on the numbers, inflation hasn\u2019t yet returned to target in the US and most other places, and the big US jobs number won\u2019t have settled any nerves.<\/p>\n Personally I don\u2019t understand the surprise.<\/p>\n Just 18 months ago, confident sages were telling us we\u2019d need a recession and soaring unemployment to bring down the double-digit inflation.<\/p>\n In fact we needed neither \u2013 probably because double-digit inflation was yet another hangover from the pandemic, more than anything normally cyclical \u2013 but I\u2019m not surprised it\u2019s lingering on above 3%.<\/p>\n I was warning here as far back as 2020 that the aftershocks from global lockdowns would reverberate for years, like a cranky old machine you turn off and restart. It was never going to be a painless reboot.<\/p>\n But how much does a little bit of ongoing inflation really matter, anyway?<\/p>\n Inflation targets are arbitrary, and while it would do more damage to abandon them here, the Fed and other Central Banks can probably quietly ignore them if they believe inflation will still eventually settle, if they\u2019d rather keep the economy humming. Especially when inflation expectations seem anchored, and in the main the big demands for huge pay increases have gone away, at least outside of the public sector.<\/p>\n Alas, the trouble, as I\u2019ve belaboured above, is that political and fiscal events are rocking that quiet agenda.<\/p>\n So what does this all mean for our personal finances?<\/p>\n Well, mortgages probably aren\u2019t going to get cheaper<\/a> anytime soon.<\/p>\n Even if the UK does go back into recession, the Bank of England can\u2019t really cut much against wider rising yields. Besides, it\u2019s that market rate environment that really sets mortgage rates.<\/p>\n Higher government borrowing costs could well mean more taxes, too. Goodness knows from where.<\/p>\n And\/or spending cuts \u2013 but ditto.<\/p>\n On a brighter note savings rates should stiffen a bit. Good news for those with a stash of cash.<\/p>\n Another thing worth mentioning is that bond portfolios won\u2019t be feeling anything like as much pain as in 2022.<\/p>\n Yes you\u2019ll probably be looking at capital losses rather than the gains that seemed likely a year ago. But check out this five-year graph:<\/p>\n Source: Google Finance<\/a><\/p>\n The recent declines in iShares\u2019 core long-term bond ETFs are not pretty, but they\u2019re nothing on the scale of what we saw in 2022.<\/p>\n As I\u2019ve stressed a few times over the past couple of years, the dramatic re-rating of bonds<\/a> from the near-zero era was a one-time massacre that shouldn\u2019t put you off the asset class for life.<\/p>\n If your preferred asset allocation wants them in your portfolio, then you needn\u2019t overly-fear a repeat of 2022. Or at least if we saw another 2022 in a hurry then we\u2019d have problems that would roil everything else in your portfolio except perhaps for gold and tins of beans.<\/p>\n Finally, I presume those of you who believe that holding individual long bonds would somehow have saved you from the murderous maths of the 2022 bond sell-off will finally listen to me when I say that it wouldn\u2019t have.<\/p>\n Here\u2019s how the Treasury 4.5% 2042 gilt has behaved over the past three months, for instance:<\/p>\n Source: Hargreaves Lansdown<\/a><\/p>\n And here\u2019s the five-year chart:<\/p>\n Source: Hargreaves Lansdown<\/a><\/p>\n As the second chart shows, own expensive bonds trading above-par and you\u2019ll get whacked when yields rise, whether you hold the bonds individually or in an ETF that makes the job easier for you.<\/p>\n There are other reasons you might prefer to own individual bonds. But I see so much confusion in the comments about it that I think it needs its own article. For now know that reducing duration<\/a> is the only way to prevent this kind of short-term volatility (typically at the cost of long-term returns).<\/p>\n I\u2019ll leave you with a hopeful thought.<\/p>\n Normally when ever-boring bonds make headlines around the world, we\u2019re near or even past the peak of things getting worse.<\/p>\n So I imagine yields will steady from here. At least for a while.<\/p>\n Have a great weekend!<\/p>\n The Slow and Steady passive portfolio update: Q4 2024 \u2013 Monevator<\/a><\/p>\n Pensions and inheritance tax: Rugged by Reeves \u2013 Monevator<\/a><\/p>\n From the archive-ator: Three crucial steps to making New Year\u2019s Resolutions work \u2013 Monevator<\/a><\/p>\n Note: Some links are Google search results \u2013 in PC\/desktop view click through to read the article. Try privacy\/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.<\/em><\/p>\n US jobs market soars past expectations in last report before Trump \u2013 Guardian<\/a><\/p>\n Britain\u2019s gas storage levels \u2018concerningly low\u2019 after cold snap \u2013 Sky<\/a><\/p>\n Tesco faces \u00a3250m in extra costs after Budget tax shake-up \u2013 This Is Money<\/a><\/p>\n Lloyds to let customers use Halifax and BoS branches \u2013 BBC<\/a><\/p>\n Man told he can\u2019t recover \u00a3598m of Bitcoin from Welsh tip \u2013 BBC<\/a><\/p>\n Hard-boiled egg becomes healthy on-the-go hit for shoppers \u2013 Guardian<\/a><\/p>\n \u201cMy mum died after four days on an A&E trolley\u201d<\/em> \u2013 BBC<\/a><\/p>\n Which celebrities popularised (or tarnished) baby names? \u2013 Stat Significant<\/a><\/p>\n Chip launches best buy easy-access savings account, bucking trend \u2013 T.I.M.<\/a><\/p>\n How to get cashback on train tickets \u2013 Be Clever With Your Cash<\/a><\/p>\n Get up to \u00a31,500 cashback when you transfer your cash and\/or investments to\u00a0Charles Stanley<\/a>. 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Collins \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n Number Go Up: Inside Crypto\u2026<\/em>\u00a0by Zeke Faux \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n Side Hustle<\/em>\u00a0by Chris Guillebeau \u2013\u00a0\u00a30.99 on Kindle<\/a><\/p>\n Richest use up their fair share of 2025 carbon budget in ten days \u2013 Guardian<\/a><\/p>\n Hottest year on record for the planet in 2024 \u2013 Guardian<\/a><\/p>\n Is climate change to blame for the California wildfires? \u2013 A.P. via Euronews<\/a><\/p>\n Wind was Britain\u2019s top electricity source last year\u2026 \u2013 Reuters<\/a><\/p>\n \u2026and the UK\u2019s EV charging network saw record growth\u2026 \u2013 This Is Money<\/a><\/p>\n \u2026indeed, EV sales are up around the world \u2013 Semafor<\/a><\/p>\n On roads teeming with robotaxis, street crossings can be harrowing \u2013 W.P. via MSN<\/a><\/p>\n The slow assassination of the free press \u2013 How Things Work<\/a><\/p>\n January 6 was successful \u2013 Unpopular Front<\/a><\/p>\n The truth about January 6\u2026 \u2013 Kottke<\/a><\/p>\n \u2026and what really happened with the first police officer suicide \u2013 Politico<\/a><\/p>\n Meta\u2019s free speech grift [Or: if you can\u2019t beat \u2019em join \u2019em]<\/em> \u2013 Kottke<\/a><\/p>\n $1m knee pads \u2013 Spyglass<\/a><\/p>\n Understanding DOGE as procurement capture \u2013 Anil Dash<\/a><\/p>\n Against optimisation \u2013 The Garden of Forking Paths<\/a><\/p>\n Why we struggle \u2013 Humble Dollar<\/a><\/p>\n The extreme self-care trends shaping young men \u2013 Men\u2019s Health<\/a><\/p>\n 144 ways the world got better in 2024 \u2013 Reasons to be Cheerful<\/a><\/p>\n Why Germans don\u2019t do it better [Podcast]<\/em> \u2013 A Long Time in Finance<\/a><\/p>\n Coffee drinkers reap a health boost, provided they drink it in the morning \u2013 Guardian<\/a><\/p>\n \u201cHow much money you made or lost on your last investments can transform how risky you think the next one is. The same bet can feel either dangerous or safe, depending on whether you are on a hot streak or in a slump. That\u2019s how your investing brain is designed.\u201d Like these links? Subscribe<\/a> to get them every Friday. Note this article includes affiliate links, such as from Amazon<\/a> and Interactive Investor<\/a>.<\/em><\/p>\nIt\u2019s different this time<\/h3>\n
![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/01\/US-rates-post-fed-2024-e1736589323597.jpg?resize=1000%2C470&ssl=1\")
<\/p>\n\n
Terminal bore<\/h4>\n
It\u2019s a mad-a world<\/h3>\n
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<\/a><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/01\/Trump-Jan-6.jpeg?resize=800%2C810&ssl=1\")
<\/a><\/p>\nBack in basket-case Britain<\/h4>\n
Inflated expectations<\/h3>\n
The bond scare and you<\/h3>\n
The 60\/40 sitrep<\/h4>\n
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<\/a><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/01\/T42.jpg?resize=1024%2C497&ssl=1\")
<\/a><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/monevator.com\/wp-content\/uploads\/2025\/01\/T42-five-years.jpg?resize=1024%2C550&ssl=1\")
<\/a><\/p>\nThe bond news signal<\/h4>\n
From Monevator<\/h3>\n
News<\/h3>\n
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<\/a><\/p>\nProducts and services<\/h3>\n
Comment and opinion<\/h3>\n
US markets are whack: 2025 edition<\/h3>\n
2024 portfolio reviews mini-special<\/h3>\n
Naughty corner: Active antics<\/h3>\n
Kindle book bargains<\/h3>\n
Environmental factors<\/h3>\n
Robot overlord roundup<\/h3>\n
US misrule mini-special<\/h3>\n
Off our beat<\/h3>\n
And finally\u2026<\/h3>\n
\u2013 Jason Zweig, Your Money and Your Brain<\/em><\/a><\/p>\n