# Bond hysteria, a leaky Hormuz and fiscal incontinence

_Bond markets are blaming the government’s borrowing. I think they are reacting to the oil price, and to a Fed chairman who says he has work to do. Plus the Strait of Hormuz is leakier than advertised, and a PM who cannot decide whether the Tories spent too much or too little._

Neil Woodford · 4 September 2026 · 6 min read

![Closeup of the bow of USS Abraham Lincoln showing aircraft on the flight deck and rust at the waterline.](https://cdn.sanity.io/images/v3acfbvo/production/62624d12d613c9cc41396770162936774313a864-1439x959.jpg?w=1600&fit=max&auto=format)

_The USS Abraham Lincoln arrives at Laem Chabang, Thailand, after 264 consecutive days at sea, much of it supporting combat operations in the Middle East. Its rust-streaked hull has prompted comparisons with pristine Chinese carriers, but appearance is not readiness: this is the visible toll of an extraordinary deployment, not, by itself, evidence of neglect._

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Whilst equity markets have had a relatively uneventful week, bond markets have been bordering on hysterical, which is an unusual confluence. Geopolitics have also returned to the top of the “things to worry about” list, largely thanks to increased tension in the war between the US and Iran, further exchanges of fire (albeit limited), and an inevitable rise in oil prices. Controversially, I think higher energy prices are affecting bond markets right now, not the scale of government borrowing, which most commentators seem obsessed with. (The so-called bond market vigilantes schooling the new PM and his Chancellor is [the most popular but wrong story](https://www.noisecancelling.co/read/deficits-gilts-and-the-cost-of-living).) _(Neil in the margin: The phrase dates from the 1980s, coined by strategist Ed Yardeni for bond investors who dump government debt to punish profligate fiscal or monetary policy, forcing yields up until the politicians behave. The Truss mini-budget of 2022 is the recent UK folk memory being invoked.)_

Finally, I couldn’t resist the temptation to have a go at some of Mr Burnham’s comments in his first PMQs this week, which were so ridiculous they made me laugh out loud.

## The Gulf, again

So, first, the war in the Gulf and the first exchange of fire between the US and Iran for about a month. Inevitably, rising tension and concerns that the conflict might once again escalate materially have immediately affected oil prices and appear to have also influenced gas prices in Europe (see chart below). 

With Brent crude at $96 and European gas prices at €72.3, one might be tempted to believe, as many were earlier this year, that we are about to embark on another existential energy price-induced inflation spike. I am not so sure. In the first place, Brent peaked at $120 earlier in the year and, despite remaining elevated throughout the spring and summer, UK inflation fell. 

Whilst it is fair to accept that UK inflation will likely pick up a bit from its current 2.9% level, talk of 4–5% by the year-end just looks ridiculous to me.

![European gas has doubled in a year](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-3sep26-ttf-1y-900f6e3c3a0a-light.png)

_€72 a megawatt hour, up from €32 a year ago, and the renewed exchanges of fire this week took it to a new high for the conflict. Ugly, on this view._

Finally, it is also worth bearing in mind that more reports are coming out of the Gulf this week indicating that the Strait of Hormuz is somewhat more permeable than many commentators might have believed. For example, [CNN reports](https://www.cnn.com/2026/09/02/politics/latest-us-strikes-against-iran-marked-a-shift-in-strategy) that the US military escorted 40 vessels carrying 18mn barrels of oil through the Strait of Hormuz on Tuesday. ([The pre-war daily average was about 20mn barrels](https://www.eia.gov/international/content/analysis/special_topics/World_Oil_Transit_Chokepoints/) of oil and petroleum products.) The US Energy Secretary [has again said that oil is flowing out of the Gulf](https://www.cnbc.com/2026/09/02/energy-secretary-chris-wright-tells-cnbc-that-more-than-17-million-barrels-of-oil-transited-hormuz-on-monday.html), and that on Monday 17mn barrels exited the waterway; [traders’ estimates](https://www.bloomberg.com/news/newsletters/2026-09-01/hormuz-oil-flow-recovery-imperiled-by-renewed-tanker-attacks) put the average at 6–8mn barrels a day in recent weeks.

_[Embedded media](https://www.cnn.com/2026/09/02/politics/latest-us-strikes-against-iran-marked-a-shift-in-strategy)_

Also in relation to the impact higher energy prices might have on UK inflation, let’s not forget that Mr Burnham has just spent a few weeks touring the country talking about the elevated cost of living (crisis), and that he is focused on doing what he can to bring those costs down. I am pretty confident that there is more he will want to do to insulate households from further cost of living increases, and that might include, for example, taking VAT off the gas price, which would clearly reduce the impact of higher gas prices through the winter and would of course keep inflation down too. 

Although the increase shown above looks ugly on a one-year view, the second chart, shown below, puts this most recent increase in context by comparing it with what happened after Russia invaded Ukraine back in 2022.

![Ugly on a one-year view. Nothing like 2022.](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-3sep26-ttf-5y-3c3b0ece32e6-light.png)

_Same series, five years. The 2022 peak was €339. Elevated, yes; nowhere near the extreme levels reached after Russia invaded Ukraine._

Clearly prices are currently elevated, but they are nowhere near the extreme levels reached back in 2022.

## Vigilantes? No, Treasuries

Whilst it is impossible to prove, I do not share the consensus view I hear so frequently now that elevated gilt yields are a reflection of the bond market’s displeasure with the incumbent government’s fiscal policy. Whilst I share the view that we have a spendthrift government that is incapable of controlling government spending (see below), the bond vigilante argument just doesn’t hold water for me. 

In my view, ten-year yields are elevated in the UK simply because ten-year Treasuries are too, and that is because [inflation in the US is at 3.4%](https://www.bls.gov/news.release/archives/cpi_08122026.htm) (it is 2.9% in the UK) and the new Fed chairman [has just given a speech](https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm) which indicates he is concerned about this. Given the market now thinks that an increase in Fed funds at the September meeting is more likely, that has been reflected in a higher ten-year Treasury yield, which has dragged gilt yields with it. _(Neil in the margin: The Federal Reserve's policy rate, set at its FOMC meetings. Neil's argument is a correlation-versus-causation one: gilt yields are being dragged up by US rate expectations, not by any specific British fiscal sin.)_

_[Embedded media](https://x.com/Reuters/status/2093443569553953279)_

Interestingly, today (Thursday) government bond markets are in a somewhat better mood and yields have fallen again – the US ten-year to 4.76% and the equivalent gilt to 5.16%, a 40bp premium. If anyone doubts that this close relationship exists, they might examine the chart below. _(Neil in the margin: A basis point is one hundredth of a percentage point, so 40bp is the 0.40% gap between the 5.16% gilt and the 4.76% Treasury. The tightness of that spread shows the two markets move together.)_

![Gilts go where Treasuries go](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-3sep26-uk-us-10y-d27ea815319b-light.png)

_If anyone doubts the relationship exists, here it is. Gilt yields are elevated because Treasury yields are, and Treasury yields are elevated because US inflation is at 3.4% and the new Fed chairman says he is worried about it._

## The fiscal squeeze

Whilst I do not buy the vigilante argument, I do accept that higher gilt yields will impose all sorts of pressures on the new prime minister and his chancellor. Over the next eight weeks (why on earth does it take so long?) the OBR will be formulating its forecasts, which will frame what happens in [the budget at the end of October](https://www.gov.uk/government/news/budget-to-move-power-and-money-out-of-westminster-and-into-every-postcode-around-britain).  _(Neil in the margin: The Office for Budget Responsibility, the independent fiscal watchdog set up in 2010 whose forecasts the Chancellor must build the budget around. Higher assumed borrowing costs feed straight into its debt-interest projections and shrink the room for manoeuvre.)_

Higher gilt yields will result in higher debt funding cost assumptions, which will, amongst other things, shrink the scope of what the chancellor can do whilst remaining within the fiscal rules. Once again, I suspect that because this government cannot control spending, their solution to this problem, as it always is, will be to raise taxes again, just as they did in 2024 and in 2025. _(Neil in the margin: Self-imposed Treasury targets — typically that debt should be falling as a share of GDP by year five of the forecast, with day-to-day spending covered by revenue. They are non-statutory and routinely rewritten when inconvenient.)_

I bumped into this unpleasant reminder of Rachel Reeves’ first budget this week when I was researching this piece. It is the OBR’s summary of her first budget’s impact:

> Against a broadly unchanged economic and fiscal backdrop since March, this Budget delivers a large, sustained increase in spending, taxation, and borrowing. Budget policies increase spending by almost £70 billion (a little over 2 per cent of GDP) a year over the next five years… As a result, the size of the state is forecast to settle at 44 per cent of GDP by the end of the decade, almost 5 percentage points higher than before the pandemic.
>
> — [Office for Budget Responsibility](https://obr.uk/efo/economic-and-fiscal-outlook-october-2024/)

Almost £70bn a year for five years is £350bn. Not satisfied with this egregious burden, [last year’s budget](https://obr.uk/efo/economic-and-fiscal-outlook-november-2025/) left spending in 2029/30 a further £32bn a year higher than the OBR had forecast in March 2025, and it seems that Mr Burnham and his Chancellor will keep up the tradition by increasing spending again in October.

Which makes it all the more ironic that [at his first PMQs this week](https://hansard.parliament.uk/Commons/2026-09-02/debates/64E68DAF-DE26-43C9-A6E0-ED2ED525D1FF/Engagements) Mr Burnham not only criticised the Tories for overseeing a rising debt to GDP level (which is true) but then went on to profess that his government would be “grounded in fiscal responsibility”. More accurately, this government is grounded in fiscal incontinence, but I was also fascinated with the criticism that the Tories had presided over a rising debt to GDP ratio. The implication being that the Tories had spent too much money, an accusation that sits uncomfortably next to his accusation that the Tories had presided over fourteen years of austerity. Which is it, I wonder, because it cannot be both? 

Most ironic of all is that the government’s original excuse for massively increasing spending and tax was to make up for years of Tory neglect and under-spend on public services. But now the PM is criticising the previous administration for presiding over a rising debt to GDP ratio. You could not make it up!

_[Embedded media](https://www.youtube.com/watch?v=mhVrMzW4ZaY)_

## What to look out for next week

There are a few things to be aware of. First, [the Chancellor will be giving a speech on Monday](https://uk.finance.yahoo.com/news/uk-finance-minister-healey-major-144800512.html), where I presume he will be talking about tough choices and fiscal probity etc. I am not holding my breath for a confession that the Labour government has spent and taxed too much, and that the answer to the challenges he confronts will be to reduce both. Instead, I suspect there will be dark hints of what Andy Haldane described as the hat-trick – the third budget in a row that will increase spending and tax. (By the way, [Andy was advising the government to avoid the hat-trick!](https://www.gbnews.com/money/andy-burnham-tax-hike-bank-england)) _(Neil in the margin: The former Bank of England chief economist, now a prominent public commentator. A cricketing hat-trick is three wickets in three balls; here it means a third consecutive tax-and-spend budget.)_

Then on Friday we get [GDP data](https://www.ons.gov.uk/releases/gdpmonthlyestimateukjuly2026), which I will be taking a very close look at. If the numbers come in in line with consensus, it will be confirmed that so far in 2026 [the UK is the fastest growing economy in the G7](https://www.resolutionfoundation.org/press-releases/economy-slows-but-doesnt-stall-as-the-uk-economy-leads-the-g7-on-growth/).

In the US there is the usual diet of labour market data and, at the end of the week, important inflation data that bond markets will be paying close attention to, as I suspect will the Fed chairman.

Thankfully the corporate results diary is still relatively subdued, albeit that quite a few small and mid caps are reporting in the UK.