UK bond market sell-off heaps pressure on Reeves

LONDON: Rachel Reeves is facing her first major test as Britain’s finance minister after the government’s borrowing costs jumped sharply this week and the pound tumbled, potentially forcing her to cut future spending.

The Treasury said late on Wednesday that it would maintain “an iron grip” on the public finances in response to a two-day selloff in debt markets that pushed the yield on 30-year British government bonds to a 26-year high.

The value of the pound fell along with gilt prices, prompting some comparisons with the 2022 “mini-budget” crisis that forced former prime minister Liz Truss out of Downing Street although this week’s market moves have been less sharp.

Gilt yields rose again in early trade on Thursday while the pound was headed for its biggest three-day drop in nearly two years. Investors, already on edge about the incoming administration of US President-elect Donald Trump, are worried about the combination of high borrowing in Britain planned by Reeves and Prime Minister Keir Starmer and the impact of their higher taxes for business.

The launch last October of the new Labour government’s programme for more investment in public services and infrastructure to speed up economic growth coincided with a rise in borrowing costs in global financial markets triggered by Trump’s election victory.

“The gilt selloff of the last few days has inevitably grabbed the headlines, where a common conclusion is to point fingers at the government,” Mike Riddell, portfolio manager and fund management giant Fidelity International said.

“But this would miss the point. It is mainly a global fixed income story.” Benchmark US 10-year yields hit their highest levels in more than eight months on Wednesday on concerns about the inflationary implications of the policies that Trump’s administration could revive, chief among them his promise to impose sweeping import tariffs.

That could push up inflation in the US, leaving Treasury yields high with a knock-on effect on UK market rates which strain the British government’s already tight budget and weigh on the economy.Furthermore, investors think the Bank of England is likely to move only slowly with interest rate cuts, given the persistence of inflation pressures in Britain’s jobs market.

OFF TRACK

Some of the problems facing Reeves stem from her first budget speech on October 30 when she gave herself only a small margin of error for meeting her target of balancing spending on public services with tax revenues by the end of the decade.

Economists think the recent rise in UK borrowing costs and a stagnant economy since around the time of the election last July mean Reeves might already be off course to hit, requiring her to announce new measures to show investors she can get back on track.

Reeves has said she does not plan a repeat of big tax increases after her hike in social security contributions for employers from April prompted howls of protests from corporate leaders and caused a slowdown in their hiring plans.