The financial markets are a discounting mechanism, pricing not just the present but every conceivable future. Yesterday, a new variable entered the equation: the First Lady’s private fears about the President’s health during that calamitous June debate. Sources close to Jill Biden have revealed she believed her husband may have suffered a transient ischaemic attack or similar neurological event. The White House promptly denied any such medical episode. But in the world of bonds, denial is not a hedge. The yield on the 30-year gilt has already begun to twitch.
Let us be clear: this is not a medical journal. It is a financial one. I view this disclosure through the lens of fiscal credibility. A president perceived as physically compromised is a president whose spending promises become suspect. Capital flight is a discipline that punishes uncertainty, and the uncertainty here is acute. The Obama-era adage ‘never let a good crisis go to waste’ has mutated into ‘never let a bad debate go unanalysed.’ This is yet another reminder that the cheapest hedge is sometimes a frank admission of risk.
The Jackson Hole symposium later this month will now carry extra weight. Central bankers who had been preparing for a soft landing are recalibrating for possible political turbulence. The Bank of England’s chief economist, Huw Pill, recently warned of upside risks to inflation from sticky services prices. But a health scare in the White House is a different sort of upside: it is a political volatility premium. Gilt yields may overshoot as investors demand compensation for the possibility of a snap primary challenge or a constitutional crisis.
I recall the summer of 2019, when a seemingly innocuous GDP revision sent the FTSE 100 into a tailspin because it broke a pattern of steady growth. Markets hate surprises. This is not a surprise. It is a slow drip of anxiety, seeping into the futures curve. The denial itself is part of the story. Denial is not a price anchor. The market will now question every official statement about the President’s health. Trust, like capital, is a finite resource. Once depleted, it is expensive to rebuild.
What does this mean for the pound? Sterling had been enjoying a mild rally on the back of a relatively stable UK political backdrop. But currency traders are reading the same headlines. The dollar, for all its fiscal looseness, remains the haven in a storm. If the Biden administration loses credibility, the pound could suffer collateral damage as capital seeks safer harbours. The US dollar index (DXY) is already up 0.3 per cent in early trading.
Fiscal responsibility is the first casualty of uncertainty. With a president potentially less able to negotiate, the next spending bill becomes more unpredictable. The Congressional Budget Office’s latest projections already show the deficit hitting 7 per cent of GDP by 2034. Add a health crisis to that equation, and you have the ingredients for a gilt sell-off of the kind not seen since the Truss mini-budget debacle. I am not being hyperbolic. The pattern is the same: perceived weakness at the top invites speculation.
So here is my advice to portfolio managers: reduce duration. Lock in yields while you can. The 10-year Treasury yield has already crept higher. The UK’s equivalent is following. This is not a time for heroics. It is a time for liquidity. And watch the reaction of credit default swaps on US sovereign debt. They are the canary in this particular coalmine.
In conclusion, whether or not the First Lady’s fears were medically verified is beside the point. The market has already priced in the possibility that they were. The denial is a confirmation. The only question remaining is how high the risk premium must go before it is fully discounted. I suspect we are not there yet. Hold your positions, but do not sleep on them. The news cycle is unforgiving, and so are a well-informed market.
