For over forty years, British public debate has been haunted by a ghost story. It goes like this: when governments step out of line, “bond market vigilantes” appear from the ether, selling gilts, raising yields, and punishing fiscal misbehaviour.
This tale is routinely invoked in Westminster and Fleet Street as if it were an external law of nature, an invisible sheriff that disciplines elected governments. However, it is merely a political fiction, regardless of how convincing it may appear. As long as we treat it as truth, we will continue to sacrifice public purpose at the altar of an imaginary constraint.
To dismantle the story, we must begin with its premise. The claim is that financial traders impose an “external constraint” on the Chancellor. If government decisions move interest rates, traders supposedly suffer losses and sell bonds in self-defence, thereby raising yields and disciplining the state.
In practice, this flips reality on its head. The UK government, via the Bank of England, controls the very money in which gilts are denominated. The only institution that ultimately sets the risk-free rate is the Bank of England. The only entity that controls the supply and maturity of gilts is the Debt Management Office (DMO). The constraint, therefore, is not natural; it is manufactured.
The easiest way to kill the myth is to expose its plumbing. The bond market is not an independent power; it is a distribution channel for the state’s own liabilities. Every gilt is issued by choice, in quantities determined by regulation and operational habit rather than necessity. If the state offered fewer gilts, yields would fall. If it provided none, the bond market for government debt would shrink to irrelevance.
The vigilantes do not discipline the government; the government sustains the vigilantes.
The Political Subsidy
Why does the mythology persist? Because it is politically expedient. It allows commentators to portray democratic choices on spending, taxes, or investments as dangerous deviations from a supposedly natural economic order. It depicts traders as neutral guardians of the realm.
The rhetoric works because it intentionally blurs the distinction between monetary policy, liquidity management, and fiscal politics. It allows those who benefit from a stable supply of government paper, such as banks, insurers, pension schemes, and leveraged funds, to frame their preference for frictionless collateral as a non-negotiable national interest. It is a narrative that protects their business models.
The blunt truth is that the bond market’s “discipline” relies on an uninterrupted supply of state-guaranteed financial assets. These gilts carry no credit risk and serve as the backbone of private leverage.
When commentators warn that fiscal policy must “appease the markets,” what they are really saying is that the state must continue feeding the financial system with these risk-free instruments so they can be profitably traded, repo’d, or used to engineer yield.
It is not fiscal responsibility they are defending; it is a subsidy.
Reclaiming Democratic Space
If the UK wishes to reclaim its democratic agency, this subsidy must be acknowledged and, if necessary, withdrawn. “Nuking the bond market” does not mean repudiating government securities or defaulting on them. It simply means redesigning the institutional machinery so that financial markets cannot hold the political process hostage.
The tools to do this are operationally orthodox:
The Bank of England can stabilise yields at any point on the curve by announcing a target and standing ready to transact.
The DMO can restructure issuance to avoid unnecessary duration risk or meet different demands.
The Treasury can smooth cash flows without relying on volatile market issuance, triggering automatic provision by banks that are signed up to the Sterling Monetary Framework.
The state can, if desired, gradually reduce issuance, turning gilts back into what they were historically: policy tools, not structural obligations.
None of these options violates any core macroeconomic principle. What they do violate is the political narrative that financial markets are Old Testament gods that must be appeased.
And that is precisely why these options must be on the table.
The political system cannot function if spivs in the money markets dictate every budget. The public cannot deliberate on schools, hospitals, or green investment if the answer is always, “The markets won’t allow it.”
This rhetorical veto persists only because we permit it. Like every wardrobe monster, it survives unchallenged until someone switches on the light.
The task, then, is not to outwit the bond vigilantes. It is to recognise that they exist only because we continue to create the conditions for their existence. Kill the conditions, and you kill the myth.
Reclaiming fiscal policy from financial folklore is not an act of rebellion. It is an act of democratic hygiene.
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