Britain’s high borrowing costs and low fertility rate could trap us in a debt doom loop

It’s not just that borrowing costs are up – there is more volatility too. Using daily data starting in 2005, we can isolate days when yields have shifted 25 basis points or more. That’s big: as big as the adjustments the Bank of England’s rate setters make to stimulate, or slow, the economy. There have been lots of shocks – the crash, the referendum, the pandemic – yet most of the big market-shaking days have happened since 2021. What explains Britain’s debt shakes?

Bond yields and prices move inversely. Our high and shaky yields mean that the prices investors – savers – are willing to pay are low, and moveable. Seen that way, Britain’s debt pain is easier to understand.

State penury is not new in Britain: Charles II was so cash-strapped that he “stopped” all payments from the exchequer in 1672. A precursor to the national debt emerged in the 1690s to raise funds in response to the crisis. There was nothing else like it: investors plunged in, bailing out a monarch.

Today by contrast, debt issuers must fight internationally for funds. Putting Germany aside, every other G7 nation is borrowing more year on year. The OECD reckons that fully $17tn will be issued by its rich-nation members this year.

These paper promises, once innovative, are now incredibly common. Rivalry tends to lead to lower, and more volatile, prices.

Demographics are another source of wobbles. Official UN projections from 2019 put the UK fertility rate at around 1.8, well below the 2.1 needed to sustain the native population. Since then, demographers have realised this was hopelessly optimistic: fertility projections are being adjusted down, and down again. The result is that population growth – and the size of the future tax base – rests on immigration, a more volatile trend.

Demand is in flux, with big and reliable buyers signalling their retreat from markets. Between 2008 and a peak in 2022, G7 central banks bought $15tn in government bonds. The idea of quantitative easing (QE) was to provide stable demand for debt, pushing up bond prices and lowering interest rates. Their new strategy – quantitative tightening – does the reverse.

QT has already been slowed in Britain and could be paused completely if needed; it is a domestic policy choice. Other bond decisions happen further away. Across Europe, pension funds are shifting towards a “defined contribution” model – a change which tends to favour stocks over bonds.

As a way to stove reserves, the Brics group of emerging nations are mulling a new currency, and have reduced their investment in G7 debt. Whether in Copenhagen or Shanghai, decisions taken by foreign governments influence the taste for British bonds.

Nimbler players have become more important in the debt game, too. Hedge fund holdings of US debt more than doubled from around $1.5tn in 2022 to $4tn in 2024. In the UK market, a similar trend is seen. Hedge funds use leverage: since trades offer a low margin, they borrow vast amounts so that their bets can be made at scale. When hedge funds change their minds, and “unwind” these trades, huge tranches of debt can be quickly sold. Hedge funds may prove willing buyers of debt, but they can prove flighty and be rapid sellers too.

These shifts have all intensified in the past five years. Another change makes the problems more transparent. Using Nexis, a database that tracks news coverage, we searched for media mentions of the Office for Budget Responsibility. The UK’s fiscal watchdog, set up in 2010, was in the news about 1,500 times a year in its first five years. Coverage has jumped: 4,000 articles is the new norm. Independent oversight is a good thing, but the pressure is rising. Britain’s debt problems – its low and wobbly prices – are now very public. That is why they are Rachel Reeves’s biggest challenge this November.

Richard Davies is a professor at the London School of Economics and Director of the UK’s Economics Observatory

Photography by Fine Art Images/Heritage Images via Getty Images