The most important interest rate in the world went through 5 per cent on Friday. That is the yield on ten-year US Treasury notes, and it is the highest since the spring of 2007. The US government has the largest national debt in the world, all $33 trillion (£27 trillion) of it, and rising by $1.6 trillion a year.
What it has to pay to service that debt acts as an anchor for everyone else. That is not just US corporations and homebuyers, but anyone seeking to borrow in dollars anywhere in the world.
That too has an indirect impact on the cost of money in other currencies. So here, the Government is paying 4.7 per cent on ten-year gilts, whereas at the start of this year when the US rate was 3.8 per cent it was paying 3.5 per cent. In Germany the rate has risen from 2.4 to 2.8 per cent – and so on.
The gap between what the US government pays and what the rest of us have to stump up will vary, but the influence is profound. So if, as some expect, the US rate rises to 6 per cent, our Government will find itself paying something like 5.5 per cent. If it eases back, the clouds lift for us too.
It is worth making this point, because we have the illusion that the Bank of England is all-powerful when setting the cost of borrowing in the UK.
Food for thought: It would be great to know where US bond yields will peak, but no-one does
The earnest meetings of its Monetary Policy Committee eight times a year do indeed fix short-term rates and that affects the interest you get on a deposit account or pay on a mortgage tied to the base rate.
But the longer the term of your loan or deposit, the less control the Bank has. Borrow for ten years or more and it has very little say at all. Borrow for 30 years and it has none. If you really want to be scared, the 30-year UK gilt yield went to 5.1 per cent on Friday, its highest since 1998.
It would be great to know where US bond yields will peak, but no-one does. Maybe we are close to it, maybe not. The surge in recent weeks has shocked the professionals, nearly all of whom failed to see this one coming.
What we do know with some confidence is that money is likely to remain expensive for the foreseeable future. We must get used to it.
So what will this world feel like? Some thoughts.
First, governments will increasingly come under huge pressure to cut their deficits. They will have no choice but to do so. The whole rhetoric of politics is around spending money, though they usually use the nice word ‘invest’ rather than ‘spend’ to describe what they are doing.
Remember how poor Liam Byrne, the outgoing Labour Chief Secretary to the Treasury in 2010, was castigated for the honest, if unhelpful, note he left his successor David Laws? ‘Dear Chief Secretary, I’m afraid there is no money. Kind regards – and good luck! Liam.’
This will affect business the world over. Companies with strong balance sheets will be fine. So too will those in activities that throw out a lot of cash. But long-term investment will have to pay its way, and weak companies that have already been struggling under a big debt load will find themselves needing a rescue.
This will move right across the spectrum, large to small. I was talking to some people who ran retirement homes the other day. They said they could just make the numbers add up at present interest rate levels, but if they went up another percentage point or more, they would have to stop new projects. There will also be some impact on the availability of risk capital.
There is the wider point here about an uprating of the solid companies that make up the FTSE 100 index vis-a-vis the big tech ones in the US. I had expected that to happen by now. It hasn’t yet done so, but eventually value will win out.
Beyond this, there is the general issue of how good ideas get funded. The entire venture capital climate has been pretty bleak in recent months, and the higher cost of money means that tough times will continue a while yet.
As for asset prices more generally, obviously markets that had become puffed-up by cheap money will fall back, however quite a lot of that adjustment has happened already.
The combination of higher wages and slightly falling prices means the UK property market is heading back towards affordability, even if it has some way still to go.
UK equities are objectively cheap.
But the biggest shift of all will be one of mood. We will all – not just governments – be more cautious, and not before time.
