06/12/2025 by Tony Redondo
The Bond markets represent one of the most critical yet underappreciated pillars of modern government finance, functioning as the primary mechanism through which nations fund their operations and manage fiscal policy. In the UK, bonds are called gilts, and the gilt market serves as both a barometer of economic confidence and a vital channel connecting government borrowing needs with the BoEs (Bank of England) monetary policy objectives.
The UK has maintained a primary deficit every year since 2002-03, meaning the government consistently spends more than it collects in revenue before accounting for debt interest payments. This structural imbalance makes the bond market essential, as the government must continuously issue gilts (bonds) to finance its operations. UK government debt now approaches 100% of GDP, representing levels not seen since the late 1950s, which intensifies the importance of maintaining investor confidence in these securities.
Debt – Cosmos Currency Exchange
When the BoE adjusts its base rate to control inflation, this directly influences gilt yields, as bond prices reflect anticipated future interest rate paths. The main influences on gilt yields include the BoE base rate, inflation expectations, and movements in US treasury yields. Currently, the BoE has a delicate balancing act, having reduced interest rates from their 5.25% peak in July 2024 to the current 4% rate while simultaneously pursuing QT (Quantitative Tightening) by selling back the gilts it accumulated during previous stimulus programs.
Recent UK experience demonstrates how quickly bond market sentiment can shift. UK government bond yields are now the highest in the G7 despite the country maintaining a relatively moderate debt-to-GDP ratio compared to peers. This premium reflects investor concerns not primarily about debt levels, but about the UK’s capacity for non-inflationary growth. Bond market participants worry that persistently high interest rates may be necessary if productivity growth remains weak, creating a vicious cycle where elevated borrowing costs constrain the very investments needed to improve long-term economic performance.
The mechanics of this relationship reveal why fiscal credibility matters. When investors doubt a government’s commitment to sustainable finances, they demand higher yields to compensate for perceived risk, which in turn increases the government’s debt servicing costs. The UK’s recent fiscal challenges illustrate this dynamic vividly, with markets closely scrutinizing budget announcements for signs of discipline or excess. Higher gilt yields effectively impose market discipline on government spending choices, forcing policymakers to balance growth-enhancing investments against the imperative of maintaining credibility with bondholders who fund their operations. And it is why the bond markets remain, for now, Rachel’s Reeves’ friend. They are nervous of who could replace her as the markets feel any replacement would simply spend, spend, spend until taxpayers could bear it no more, and send borrowing costs through the roof. It’s why since the Budget, yields on 10-year gilts have actually fallen, despite all the controversy. For now, the bond markets are betting Reeves will survive.
Reeves Under Scrutiny Amid Ethics Probe Allegations | Newspage News
Currency Exchange Rates Update
The Pound rose to hit its highest level against both the Euro and the US Dollar since October, finding support from the bond markets who approve the Chancellor’s move to more than double her fiscal headroom announcement in her budget.
The upside for the Pound may be short-lived with the financial markets pricing in a 90% chance the BoE (Bank of England) will cut interest rates by 0.25% to 3.75% at their next meeting on 18 December and persistent headwinds mean 2026 is likely to be another challenging year for the currency.
The ECB (European Central Bank) also meet on 18 December but are expected to hold EU interest rates unchanged at 2% into 2026.
The Fed meet next Wednesday, 10 December and are expected to cut interest rates. Crédit Agricole’s FX seasonality analysis shows the dollar has lost ground 70% of the time in December since the millennium. Crédit Agricole says this Dollar negative year-end trend is linked to hedging and repatriation of profits earned on USD-asset holdings by foreign portfolio investors and hedging and profit repatriation by exporters that involves the conversion of USD-denominated revenues into their home currency as most global trade is priced in the Dollar.
This week, the key economic data releases include:
Monday China Trade Balance
Germany Industrial Production
Tuesday Australia RBA Interest Rate Decision
Wednesday China Inflation
Canada BoC Interest Rate Decision
US Fed Interest Rate Decision
Thursday US Trade Balance
Canada Trade Balance
Friday UK GBP & Industrial Production
Germany CPI Inflation
France CPI Inflation
What’s in the news?
The latest opinion poll by Find Out Now shows Labour support at an historic low 14%. Reform UK leads on 31%, the Conservatives are second with 20%, with the Green Party on 18% and the Liberal Democrats on 11%. Tyron Surman, Find Out Now’s head of research, emphasized the unprecedented nature of the findings, stating, “This is the lowest score we have ever had for Labour.”
UK
According to the CSJ (Centre for Social Justice), families on modest incomes will be £18,000 worse off than jobless parents claiming benefits following Rachel Reeves’s abolition of the two-child cap in the Budget. A family with three children that has at least one parent claiming the average rates of UC (Universal Credit), combined with other benefits, will receive up to £46,000 by next year compared with the £28,000 take-home earnings of a family where one adult is working full-time, and another part-time, on the national living wage.
Labour’s former City minister Tulip Siddiq has been found guilty of corruption by a Bangladesh court. Siddiq was appointed economic secretary to the Treasury and City minister following Labour 2024 general election victory but less than five months into her ministerial role, she was named in an investigation into whether her Bangladeshi family embezzled nearly £4bn from energy and major infrastructure deals.
Good news
UK manufacturing is showing signs of recovery with the S&P Global UK Manufacturing PMI (Purchasing Managers’ Index) rising between October and November, marking the first month of growth in over a year. Rob Dobson, director at S&P Global Market Intelligence, said, “It will be interesting to see the extent to which business might react to the absence of any significant growth-promoting measures. After all, despite the improvement in the performance of the manufacturing sector, any growth is still worryingly weak.”
Not so good news
The OECD (Organisation for Economic Co-operation and Development) says the UK is set to suffer the second highest level of inflation in the G7 over the next year as a result of the Labour government’s decisions to pile extra costs on businesses and also warned recent tax hikes will hit growth. It predicts that inflation would stay above the BoE’s 2% target inflation rate for the next two years.
The CBI’s (Confederation of British Industry) latest Service Sector Survey shows conditions deteriorated in the quarter to November with both business sentiment and activity dropping further across the services sector with private sector bosses expecting to accelerate jobs cuts and freeze recruitment following the Budget. Alpesh Paleja, the deputy chief economist at the CBI, said that uncertainty ahead of the Budget had caused many businesses to hold back on hiring and investment.
Global professional services giant KPMG’s latest economic outlook is forecasting a further economic slowdown in the UK in 2026 with the UK economy projected to slow by 1% in 2026, down from 1.4% in 2025. Unemployment is expected to rise to 5.2%, influenced by increased employer costs from last year’s Budget. Wage growth may decline by 3% by mid-2026, further limiting household spending. KPMG’s chief economist, Yael Selfin, stated, “The outlook for growth in 2026 is subdued, reflecting the impact of a cooling labour market and weak household spending.”
New research by Wealth Club reveals that wealthy investors are increasingly sceptical about the UK as a viable location for business and investment. Approximately 64% of respondents believe the UK is not a good place to establish a company, while 47% feel the same about investing and 79% think the UK fails to adequately support wealth creation. Despite this pessimism, 30% of investors report feeling wealthier than last year.
The IoD’s (Institute of Directors) monthly survey shows business confidence dropping to a post-pandemic low after the Budget as the absence of growth policies in Rachel Reeves’ statement dampened leaders’ moods.
The NFER (National Foundation for Educational Research) are warning that low-skilled jobs in the UK are disappearing faster than expected, with roles in sales, customer service, and administration most at risk. Employment in these areas has already fallen sharply, driven by AI adoption, outsourcing, and pandemic shifts. Up to 3 million jobs could vanish by 2035, leaving workers without higher-level skills vulnerable to unemployment.
Hundreds of landlords are facing significant tax increases following the Budget, due to higher property income tax and the introduction of a mansion tax on homes worth over £2m. The combined measures will impact at least 1,300 rented properties with landlords warning the extra costs are likely to be passed on to tenants, despite safeguards under the Renters’ Rights Act, raising concerns over further rent increases.
The UK construction sector is undergoing its worst downturn for five and a half years. A monthly S&P Global survey showed that the decline in output rapidly accelerated over the month, with the PMI now more than 10 points below the benchmark figure for neutrality. The drop in output was driven by low confidence among investors; a lack of new work being commissioned and delays in starts for new projects. This latest data is likely to cast doubt on the government’s hopes of building some 1.5m over the course of the next five years.
The SMMT (Society of Motor Manufacturers and Traders) reported that new car market saw new registrations decline by 1.6%, the sixth monthly fall of the year with purchases falling by 5.5%. The SMMT also warned that the pay per mile for electric vehicles scheme announced in the Budget will lead to a further slump in demand.
USA
The US ISM Manufacturing PMI fell to a 4-month low in November and the ninth consecutive month of contraction, with employment sliding and input prices rising.
US companies shed the most payrolls since early 2023 in November with private sector payrolls falling by 32,000, with wage growth also cooling.
Americans’ confidence in the US economy fell in November to its lowest point since July 2024. Only about two in 10 US adults said current economic conditions are excellent or good, compared to four in 10 who rated them poor and just 27% said the US economy is improving, while 68% said it’s worsening. The negative sentiment extends to the labor market, with nearly two-thirds of Americans believing it’s a bad time to get a job.
The S&P 500 stock market index is now on a seven-month winning streak, a milestone achieved only sixteen times since World War II. Stocks are on track for a third year of double-digit gains. Wall Street strategists think the streak will reach 4 years in 2026.
The northeast of the US is home to the world’s highest concentration of data centres with data showing incoming power demand continuing to grow. US data centres will require 106 gigawatts of power generating capacity by 2035 according to Bloomberg NEF analysts. That’s up from about 40 gigawatts today, and 36% more than what Bloomberg NEF predicted in its last forecast in April, as more and bigger data centres projects are announced.
The EU
Eurozone inflation rose to 2.2% in November, above the ECB’s 2% target. Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, was at 2.4% in November, unchanged from the previous month. Among its major economies, Germany’s inflation rate stood out, rising to 2.6% year-on-year, its highest pace in nine months.
The unemployment rate was unchanged in October at 6.4%, a level that has now persisted since May.
On Friday, Germany’s Bundestag approved a contentious pension reform package proposed by Chancellor Friedrich Merz’s centre-right coalition government. The vote passed narrowly with 318 votes in favour, 224 against, and 53 abstentions in the 630-seat chamber. The outcome averted a potential government crisis after weeks of internal rebellion within Merz’s conservative ranks, which had exposed tensions over fiscal sustainability and intergenerational fairness. The package is part of the coalition agreement and addresses Germany’s aging population crisis, where the worker-to-pensioner ratio has dropped from 2.7 in 1992 to under 2 today, straining the pay-as-you-go system.
Belgian police charged two senior EU foreign policy figures with fraud. The EU’s former top diplomat Federica Mogherini and a senior European Commission official, Stefano Sannino, were accused of graft over the approval of a training facility. The two are well known among the EU’s inner circle, with one official saying the scandal would have a “disastrous impact on the [bloc’s] credibility,” while another said the arrests were bad news in particular for Commission President Ursula von der Leyen, who appointed Sannino to a senior Commission role this year.
Others
India’s economy grew at a stronger-than-expected rate of 8.2% in the third quarter following 7.8% growth in the second quarter of 2025. Despite the stellar growth figures, the RBI (Reserve Bank of India) cut interest rates to 5.25%, citing weakness in some key economic indicators.
China’s General Manufacturing PMI fell to 49.9 in November, missing analysts’ expectations of 50.5. The private-surveyed reading slowed from 51.2 in September and 50.6 in October, but new export orders expanded at the quickest pace in eight months. China’s housing market downturn shows no sign of ending with fixed-asset investment, which covers real estate, declining 1.7% in the first ten months of the year, levels unseen since 2020. For October alone, fixed-asset investment fell 11.4% from a year earlier, the worst reading since early 2020. Property investment shrunk by 14.7% in the first ten months. Total local government debt has ballooned to $18 trillion due to dampened property sales, and local bond issuances hit a record high for the year. The real estate industry’s listed firms have seen combined losses of more than $9 billion. The government appears particularly sensitive to the crisis, reportedly ordering two real estate data providers to stop publishing figures, and Shanghai’s online censors recently took down more than 40,000 social media posts that were pessimistic about the sector.
Australia’s third quarter GDP grew 0.4% quarter-on-quarter, missing forecasts of 0.7%. Year-on-year growth hit 2.1%, just shy of the 2.2% estimate.
The new NZ Business Investor Work Visa launched last week allows those with NZD 1 million to invest (less than GBP 500K) an opportunity to re-locate to NZ and within 3 years to become eligible for permanent residency. Those with NZD 2 million can achieve the same after just 1 year. The scheme may contribute to the brain-drain away from the UK.
South Africa recorded stronger GDP growth in the third quarter than analysts expected. The 0.5% growth, compared with the previous three months, marked a fourth straight quarter of expansion, extending the economy’s longest growth streak since 2021. The growth was driven by strength in the mining sector and domestic consumption, but it comes only days after an influential survey showed sentiment among South African manufacturers dropped sharply in November amid weak export sales.
Gold prices hit a six-week high on Monday while silver touched a record high. Spot gold rose 0.2% to $4,240.54 per ounce. Silver jumped 2% to $57.48 per ounce after earlier hitting an all-time high of $57.86. Deutsche Bank are forecasting that gold prices will average $4,450 all of next year.
Copper prices hit a record high on concerns about tightening supply and potential US tariffs with futures hitting $11,485 a ton, up 30% this year. Demand is soaring with the metal vital for chips, electric vehicles, and power grids and the market has been hit by disruptions. Mining giant Glencore cut its 2026 production targets by about 10% on the back of problems at its mine in Chile, and there have also been setbacks at other major sites in the Democratic Republic of Congo and Indonesia.
Stranger than fiction
According to UNICEF, 95 million children have been lifted out of extreme poverty to date in the 21st century with extreme child poverty falling from 507 million in 2000 to 412 million in 2024, even with the global child population growing by a few hundred million in the last 25 years. The countries that made the largest reductions embedded child rights in national budgets, lowered the cost of schooling and healthcare, and improving labour security for caregivers.
Quote
Lao Tzu, 6th-century BC semi-legendary Chinese philosopher, “Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step.”
