My discovery of last weekend was that diesel is named after Rudolf Diesel, the German engineer who patented his compression-ignition engine in 1893. It was more efficient than steam, but the early engines were large, expensive and difficult to manufacture. Adoption was slow. Today, they are ubiquitous.
Diesel’s own story ended mysteriously.
In September 1913, while travelling to Britain to visit an engine plant and meet the Royal Navy, he disappeared overboard.
Suicide, accident and murder have all been suggested. His financial troubles support the first theory, but the approach of war led some later to speculate that German agents wanted to stop him sharing strategically important technology with Britain. The truth remains unknown.
The engine’s legacy is clearer. As the saying goes, ‘you might not pump diesel, but diesel pumps you’. It powers farming and construction and keeps global trade moving.
How diesel prices ripple through the economy
We live in a world built on hydrocarbons, which provide fuel, fertiliser, plastics, chemicals and cheap transport. Synthetic nitrogen fertiliser supports the food supply for roughly half the world’s population. Cheap energy and transport lowered prices, widened access to medicines and enabled automation. Longer lives, falling child mortality and rapid scientific progress followed.
Yet diesel supply is vulnerable to precisely the sort of weak points a highly specialised global economy creates. War in the Middle East and drone attacks on Russian refineries have driven prices sharply higher.
Restrict supply and the effect does not stop at the pump. It travels through haulage and food prices, industrial costs, household bills and eventually politics through inflation. Inflation is the great destroyer of incumbent politicians because voters encounter it every day.
Why investors are demanding higher bond yields
One of the clearest market reactions to changing inflation expectations can be seen in bond markets.
This is not a peculiarly British wobble. Long-dated yields have risen sharply in the US, France, Germany, Japan and elsewhere as investors demand more compensation for inflation.
Governments must refinance maturing debt at higher rates while issuing vast quantities of new debt. Interest bills rise and crowd out other spending.
This global bond sell-off is doing more than repricing the cost of government. It is resetting the hurdle rate for almost every asset.
How rising yields affect technology stocks
Higher government bond yields give investors a credible alternative to buying shares. They feed into mortgage rates, corporate borrowing costs and the returns required from new projects. The financial plumbing tightens long before the full economic effect appears in company earnings.
This matters particularly for technology.
The mega-cap companies, like Amazon, Meta and Alphabet, are committing extraordinary sums to data centres, chips and power infrastructure, and increasingly issuing debt to help fund them. That corporate supply competes with high government issuance for the same pool of capital.
Higher yields can make future profits look less valuable today, leaving the longest-duration bonds and most highly valued shares most exposed.
This won’t last forever.
The cure for high prices is often high prices. They encourage consumers to economise, make mothballed refining capacity worth restoring and give producers an incentive to find alternative routes and sources of supply. Refineries can come back onstream and wars end. Markets are forward-looking, so today’s shortage should not simply be projected indefinitely into the future.
The case for bonds in a higher-yield world
As we approach the Autumn Budget on 28 October it’s worth remembering that higher yields are not simply a verdict on Britain or its Chancellor. They are part of a global repricing of inflation risk, public borrowing and the price of capital.
Bond prices have fallen and yields have risen across major markets, tightening financial conditions regardless of what any one government does.
Investors should not retreat from markets or assume today’s conditions will persist. They should diversify across asset classes, sectors and geographies.
Over the long term, investors often hold a mix of shares, funds and bonds based on their goals and attitude to risk. Bonds can help reduce volatility, while shares and funds offer greater growth potential. Their value can rise and fall, so investors could get back less than they invest.
This article is for information only and not personal financial advice. Investing can help your money grow, but the value of investments can rise and fall, so you could get back less than you put in. Yields are variable and not a reliable indicator of future income. Investing is for the long term, typically 5 years or more.
If you’re not sure whether investing is right for you, a financial adviser can help.