The bond market decides

  • Public debt ratios are at records highs, with the UK’s just under 100% of GDP (c.£2.7 trn)
  • In 2023, developing nations paid $847 billion in net interest, a 26% increase from 2021
  • 25% of UK government debt is index-linked, meaning that coupons are directly linked to inflation

Governments are not immune to higher interest rates, and given their high debt burdens compared to the past, repayments are quickly becoming meaningful proportions of public spending. The UN is concerned and sounding the alarm – warning of the threat to global prosperity should such borrowing continue. In this week’s review, we ponder if fiscal deficit (the gap between the government’s income and the amount it spends) matters and review the current state of UK and US borrowings ahead of this year’s elections.

Admittedly, we haven’t seen normalised levels of government spending in recent years with both the UK and US governments stepping in to provide support to economies and consumers during the COVID pandemic by way of the furlough scheme, self-employment income support scheme and families first covid response act etc. Such schemes are estimated to cost the UK up to £410 bn and as much $16 trn in the US. As such, budget deficits have generally widened by some 3% in the past four years amongst G7 countries.

Headline budget deficits (% of GDP)

Source: Capital Economics


With the labour party set to win next weeks general election here in the UK, their leaders have been busy offering the market reassurance of their fiscal discipline – with all £8bn of spending increases promised to be financed by tax rises (as opposed to increasing debt).

The shadow Chancellor has also pledged to retain the current set of fiscal rules which require public debt to fall over a five-year period, meaning a significant spending reduction scheme would need to be implemented.


Given the significance of their economy to the global financial system, providing the worlds reserve currency and their untarnished repayment history – the US government is generally given more leeway to run up a deficit than other countries.  Nonetheless, servicing their debt now costs the US government c.4% of GDP annually – over $1 trillion in monetary terms!

The bond market hasn’t been concerned with the deficit since the 1990’s, where the term premia on treasuries rose to above 380 basis points, prompting the Clinton administration to focus on fiscal consolidation. This may provide a timely reminder to the incumbent president and Congress as to what could possibly go wrong when the bond markets call time.

Global government debt

Source: JP Morgan

Bowmore portfolios

Within Bowmore’s Core Risk 5 portfolio, government debt makes up 38% of Fixed Income exposure, of which more than 2/3rds is UK Gilts. We prefer UK government debt to US as there is less interest rate risk – the ‘higher for longer’ ideology is more prominent in the US, whereas cuts seem more imminent here in the UK.

While both US and UK Government debt is of high credit quality, we see more risk with US debt due to its ballooning budget deficit and the debt ceiling problems it constantly has.

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