The bond market has long been hailed as a vital cog in the machinery of modern economies, a sentinel ensuring fiscal discipline, and a barometer of economic stability. But is this reputation deserved? Recent turmoil in the UK gilt market following Rachel Reeves’s maiden Budget has brought this question into sharp focus. A sell-off in gilts has been framed as the righteous judgment of the “bond vigilantes” sniffing out fiscal imprudence. Yet, this narrative is built on misunderstandings and misplaced reverence for an institution that is neither necessary nor productive.
The Myths of Market Discipline
Let’s break down the received wisdom. We are told that government borrowing is constrained by the willingness of investors to lend. When spending and borrowing exceed some implicit threshold of acceptability, markets “strike back,” driving up yields and demanding fiscal rectitude. According to this view, the UK government’s plans to issue £300bn of gilts this tax year—to cover a deficit augmented by £32.3bn annually over the next five years—represents a breach of that threshold. Bond investors, alarmed by a perceived lack of discipline, have sold off.
None of this is true.
The UK government does not need to “borrow” in any conventional sense. Spending by the government is an act of money creation. When the government credits a bank account, the Bank of England records a corresponding credit and debit on its balance sheet. Taxes operate in reverse, debiting bank accounts along with a corresponding debit and credit recorded on the Bank of England balance sheet. The result is a balancing item in the accounts, which is all ‘government borrowing’ really is - occurring as a natural function of double-entry accounting, not the rapacious whims of financial brigands.
Gilts are not a necessity but a political choice stemming from the outdated “full funding rule.” This policy requires the issuance of bonds to cover deficits, a remnant of an older economic orthodoxy linked to the long-defunct gold standard. In reality, these bonds merely offer investors the option to exchange overnight reserves (which pay the Bank of England’s Bank Rate) for longer-term instruments with a fixed yield.
The Economics of Parasitism
What function, then, do bond investors serve? Advocates might argue they provide discipline, ensuring governments use public funds wisely. Yet this discipline is illusory. The bond yield is simply the market’s expectation of future Bank of England policy rates. Investors do not “set” borrowing costs; they predict them. The entire bond market’s existence rests on the unnecessary act of swapping one type of government liability (reserves) for another (gilts).
Far from being the guardians of fiscal virtue, bond investors resemble the money changers of biblical lore—skimming off the system while adding no value. Their profits are a deadweight loss to the economy. The intricate dance of issuance, trading, and yield curve management consumes resources and employs talent that could be deployed in more productive sectors. Financial engineers who might design systems to combat climate change or improve healthcare instead spend their days shaving basis points off gilt portfolios.
A Political Choice, Not an Economic Necessity
Ending the bond market is not a radical idea but a logical step toward modernising public finance. If the UK government were to eliminate the ‘full funding’ rule, it would continue to settle its obligations just as it has been doing since the 1860s—by directly crediting bank accounts. Private banks would receive the Bank Rate on their deposits held at the Bank of England, and the costly bond issuance process would end.
Critics may raise concerns about inflationary risks or a potential loss of market discipline, but these fears are unfounded. Inflation is determined by the balance between aggregate demand and real economic capacity, not by the actions of bond traders. Ultimately, fiscal “discipline” is a political choice best exercised through democratic means rather than being delegated to unelected financial elites.
Reclaiming Public Purpose
The bond market, far from being an essential institution, is a parasitic appendage—one that has outlived whatever utility it might once have had. By continuing to issue gilts, the UK government perpetuates a system that benefits a narrow class of financial intermediaries at the expense of the broader public. The talents of those currently employed in the bond market could be better used in sectors that address real-world challenges.
It is time to euthanise the bond market—not with malice but with a clear-eyed understanding that its continued existence serves no public purpose. Just as the money changers were driven from the Temple, so must we clear out this vestige of an outdated economic paradigm. The myth of the vigilantes must be dispelled. Only then can we create a monetary system that serves the needs of everyday people.
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