Carl Mortished: Global bond sell-off could send Battersea to the dogs

You should pay attention to the bond markets. If you are a normal person, rather than a fixed-income trader, that is a worrying thing to be told. After all, bonds are boring, something that Granny bought you from National Savings and you once won a prize.

If you have been paying attention in recent years you will recall that Greece and some of the other Club Med countries got into trouble over bonds. Greece had too much debt and was bailed out; interest rates on Greek government bonds and government debt in other countries soared. There were PIIGS (Portugal, Ireland, Italy, Greece and Spain); they were euro countries and Germany was very cross because they borrowed too much and Germans were asked to support the profligate behaviour of Greece, Spain and Portugal.

We in Britain felt smug — we are not in the euro and don’t have to support other people’s bad borrowing. Italian bond yields are once again soaring, up almost two percentage points over the past five months, not because Italy’s economy is in terrible shape but because the new euro-phobic Italian government is cocking a snook at Brussels, refusing to comply with eurozone rules about government deficits. Matteo Salvini, the Italian deputy prime minister, said the EU commission was the enemy of Europeans, imposing austerity, and he accused bond speculators of trying to bankrupt Italy with a view to buying up its ruined corporate assets cheaply.

However, in the absence of an Italian banking crisis the bellicose rhetoric from Rome should not trouble us. What is more worrying is the global trend towards higher rates.

The US 10-year Treasury bond, the global investment benchmark, yields 3.25%, its highest level since June 2011. That may not sound like a harsh rate but US interest rates have been in steady decline for almost three decades. Over that period, with some bumps, notably the 1990s property crash and the dotcom boom and bust, what we have experienced is a fairly steep inflation in financial asset values. When bond yields go down, bond prices go up, borrowing is cheaper and investors pile into stocks, bonds and real estate.

We have enjoyed that glorious synchronicity of falling rates and rising values for several decades. Londoners can see the impact along the banks of the Thames; the asset values soaring out of the ground at London Bridge, Nine Elms in Vauxhall and Battersea, where a one-room studio flat costs more than half a million pounds.

No one dares to think about the property bust in the early 1990s when mortgage rates soared to 15%. However, I felt a curious pricking at the back of my neck last weekend when I strolled through Battersea Power Station and marvelled at the gilt coating on the blocks of flats, the smart delis, the pricey wine bars and the absence of people.

The yield on the UK’s long gilt has more than doubled in two years. What we all want to know is whether this is just a necessary correction, part of the Bank of England’s plan to end monetary easing while keeping inflation in check, or the beginning of higher rates and falling asset values. It’s not just the evidence of hundreds of unlit, empty flats in the riverside high-rise blocks. It’s the UK’s low unemployment rate, the return of price inflation in the shops.

Of course we are not Italy, never mind Greece. Our government is not about to let rip with a budget-busting spending-spree that will send investors flying to the exit and gilt yields soaring to the rafters.

Or is it?

The Prime Minister hints that there will be a Brexit dividend, something for the NHS to sweeten the Brexit pill. Austerity is over, she said. The Chancellor is not on side. He was bullied into agreeing to her bribe and now he has the IMF urging him to put his foot on the accelerator in case we fall out of the EU with a bump and need a bit of pump-priming. Don’t even look further to the Left where John McDonnell, the shadow chancellor, is hoping for a nasty Brexit, a snap election and a massive expansion of the state with nationalisations and wealth taxes.