End of bond rally is nigh

LONG-term interest rates are on the up. They are rising here in the UK for obvious reasons, with the yield on ten-year gilts at 1.2pc, the highest since the Brexit referendum. But they are also rising in the US and the eurozone.

It is always impossible to see great turning points in markets at the moment they happen – the Footsie reaching 6950 on 30 December 30, 1999, the Brent oil price below $28 on January 20 this year – but a few months on, those turning points come into focus.

And so it may be with long-term bond yields. It is plausible that we won’t see tenyear gilts yielding less than 0.6pc, as they did in August, or of the negative bund yields hit in Germany, in our lifetimes. If this is right, the implications are huge. Share prices tend to grab the headlines but bond yields are arguably more important. They affect the price at which governments and corporations can borrow – still very cheap by any historical standards. They also affect mortgage rates.

But beyond this, they affect the solvency of pension funds inversely, because if yields are low they have to hold more stock to cover pension liabilities.

And they affect, or at least reflect, confidence. After all, if you have to pay money for the privilege of lending to the German government, what on earth does that say about your view of the future of the European economy? If that is the best thing to do, the alternative must be pretty glum.

So if a return to more normal interest rates has begun, it is a sign of confidence. It is saying that the era of central banks spraying money around is coming to an end, that savers will start to get a slightly better deal, that there will be a bit of inflation, hopefully not too much, and that this extraordinary period we have lived through is coming to an end. About time too, you might think.

The trouble is that this adjustment is unlikely to be smooth or easy.

That is partly because of short-term uncertainties over policy.

Here in the UK, the pound has taken the strain, but we don’t yet know how quickly the devaluation will feed through into prices generally. Inflation expectations are already the highest for two-and-a-half years, and understandably so. The idea of another cut in interest rates is disappearing fast.

In the US, the Fed seems committed to another rise in rates later this year, and the country of course faces political uncertainties that are not factored at all into financial markets. In Europe we will learn more this week with the European Central Bank meeting, but I think it is fair to say that even in Europe it is being recognised that the costs of ultra-loose monetary policy have become as great as the benefits.

The adjustment will also be bumpy because, well, that is the way markets are.

Once it becomes clear that something huge has changed and that bond prices will trend downwards, there is not much point in waiting to see how quickly they will move.

The central banks will try to keep rates lower for longer and they will, to some extent, succeed. There is a massive burden of debt worldwide and as a result you don’t need such a sharp rise in rates to have an impact on the economy. They will also preserve orderly markets, for that’s one of the classic central banking tasks.

But they are not all-powerful, and certainly not in the face of rising bond yields.

An appy workforce

IF YOU want a glimpse of the near future, look at what is happening on the West Coast of the US, where the Uber/Airbnb/homeworking revolution is running hot and strong in the so-called gig economy.

For it is there that the fastest growth in such jobs – where freelancers are linked to customers and service providers by apps and digital technology – is happening.

In the US, self-employment has risen to about 17pc of total employment, the same sort of level as in the UK, but in San Jose and San Francisco it is much higher.

Increasing numbers of industries seem to be becoming ‘Uberised’ as companies find it easier to buy skills rather than hire people, and at a least a minority of the workforce prefers self-employment.

Or at least they say they do. UK data suggest that roughly two-thirds of the selfemployed do so from choice and report higher satisfaction as a result.

This is despite relatively low pay; for a new study by the Resolution Foundation suggests that pay for the self-employed is lower than it was 20 years ago.

What we can learn from the US is that the fastest growth in the gig economy is in sophisticated cities, and that it works right across the skill range, for high-end professionals benefit as well as Uber drivers.

But of course there are abuses. If there is a message for us it is that we need codes of practice for the gig economy, as well as the skills, to get the best out of it.