Rachel Reeves must handle bond sell-off with care, but this is not a Truss-level event
Borrowing costs at the highest level since 1998, the pound at a 14-month low and some major UK company shares dropping like a stone,For a government that had pledged a return to economic stability, it has been a tough start to 2025 for Rachel Reeves,As the chancellor prepared to fly to China to promote closer economic ties with Beijing, the blow-up in the bond market appeared to ease on Thursday after a rough couple of days,But Reeves is still battling a political fire and comparisons to Liz Truss’s ill-fated mini-budget,Conditions in the market for UK government bonds, known as gilts, have been far from helpful for Reeves.
The yield – in effect the interest rate – on 10-year gilts reached the highest level since the 2008 financial crisis, driving up government borrowing costs and surpassing the levels reached after Britain’s shortest-lived prime minister detonated the bond market.While the situation has steadied, on longer-dated 30-year bonds the yield still remains at the highest level since 1998.If these levels are sustained, the higher cost of borrowing could wipe out the chancellor’s £10bn headroom against her self-imposed fiscal rules.Reeves has warned the rules are “non-negotiable”, teeing up the prospect of cuts to public spending to balance the fiscal arithmetic instead.It is a challenge because persistently higher borrowing costs would mean the government shelling out billions of pounds more to service the nation’s £2.
6tn debt pile.Even before the latest market shifts, the debt interest bill was on track to be about £100bn in the current financial year – a sum larger than the annual education budget – rising to more than £120bn by the end of the decade.But while the gyrations in financial markets could have serious consequences, comparisons to previous crises are overblown.Britain is not on the brink of being forced to go cap in hand to the International Monetary Fund, and is not yet close to emergency intervention from the Bank of England.So far the government believes conditions in the bond market remain orderly.
It is a stark contrast to 2022,Back then, the market reaction to Truss’s surprise unfunded tax cuts was extreme: of the top 10 biggest daily moves in the gilt market in the past three decades, nine came in 2022,The domestically focused FTSE 250 initially sold off on Thursday, before edging up 0,3% in the afternoon,Meanwhile retailers and housebuilders were among the heaviest fallers on the blue chip FTSE 100 index.
The pound has fallen by about two cents against the dollar in recent days, to about $1.23.However, in 2022, sterling fell to $1.14, the lowest level since 1985, while the meltdown in the bond market threatened to bankrupt a large number of pension funds with more than £1tn invested in them.While the level yields has reached is historic, the speed of the change is far more ordinary.
Yields have drifted higher in recent months, rather than rocketed in a short space of time – reflecting investors reacting to events, instead of panicking in response to shock news.Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionMuch of the rise in gilt yields has been driven by global factors.Investors have steadily grown more worried that inflation could be stickier than first hoped – leading to fewer interest rate cuts from the world’s most powerful central banks.Since November, that has been turbocharged by the prospect of the US president-elect Donald Trump’s policies.But there are domestic factors too.
Britain is also experiencing a bout of inflation persistence, which could hold the Bank of England back from cutting interest rates.Labour has not helped: business and consumer confidence fell sharply after Reeves warned “painful” tax increases were required.Growth has stagnated over the whole second half of 2024.The chancellor’s £25bn increase in employer national insurance contributions could also stoke inflation this year.Spying a political opportunity, the government’s critics have focused more on the latter, rather than the former.
Still, how Labour reacts will have a big impact.Reeves may be hoping bond market conditions subside – a scenario many big investment companies expect.But she could still be overtaken by political and economic pressure – leading to difficult choices on how to respond.There is a danger doom loop emerging.Tax increases or spending cuts could undermine Labour’s already shaky plans to grow the economy – which in turn could damage the public finances.
It is a situation Reeves will want to avoid.
Big retail will cope – but Reeves’ NICs raid is too much, too soon for part-timers | Nils Pratley
If one looked solely at this week’s trading reports from the world of big retail – the likes of Marks & Spencer, Next and Tesco – you might wonder why Rachel Reeves’ increase in employers’ national insurance contributions (NICs) has caused such a fuss. It is obvious from the trio’s outlook statements that they will cope with the extra costs.At Tesco, which faces a £250m extra from NICs and other budget changes, the chief executive, Ken Murphy, did not rule out price rises but said the group would do its “very best” to mitigate them; and, given Tesco’s expertise in grinding out efficiency gains, you would bet on it to succeed. In similar style, Stuart Machin at M&S noted the cost headwinds but said “there is much within our control”.At Next, Simon Wolfson gave thanks for zero inflation in the cost of goods it buys, mainly from Asia, and reckoned the clothing group could off-set the wage pressures with price rises of only 1%, or half the Bank of England’s target rate of inflation
What the bond market turmoil means for your mortgage, pension and savings
The bond market sell-off has revived fears about rising borrowing costs after the crisis that followed Liz Truss’s disastrous mini budget in 2022. However, experts are suggesting there is no need to panic. Here is what it may mean for mortgages, pensions and savings.Rates on new fixed-rate mortgages could start to creep up as a result of the bond market turbulence as lenders get funding for loans from the money markets.Simon Gammon, the managing partner at Knight Frank Finance, says that so far only a few specialist and niche lenders have raised mortgage rates
Bond market turmoil eases as Treasury minister says ‘no need’ for government intervention – as it happened
Harriett Baldwin MP accuses Rachel Reeves of having ‘fled to China’ rather than face MPs over the rise in public borrowing costs, because she realises her budget means she is “the arsonist”.Baldwin says yesterday’s statement from the Treasury (which said the government has an iron grip on the public finances) was an “extraordinary emergency” effort to calm the markets.Darren Jones says these “inflammatory” comments are rather surprising, and don’t reflect reality.The trip to China has been in the diary for weeks, he points out.And he rejects claims that the Treasury has intervened in the markets, saying yesterday’s statement was simply a response to questions from the media
Shares in banknote printer De La Rue soar after it confirms takeover talks
Shares in De La Rue, the 200-year-old British firm that prints banknotes for the Bank of England, have surged after it confirmed it was in talks about a possible takeover offer from a well-known City financier.Investment funds controlled by the pensions and private equity entrepreneur Edi Truell have made a conditional offer for De La Rue worth 125p a share, valuing the company at £245m.The deal would be conditional on the completion of De La Rue’s planned £300m sale of its authentication division to Crane NXT, which was announced last October.De La Rue said in a statement to the stock market that its board was “considering its options”.The firm said in December that it had been approached by Truell and companies he founded about a partial takeover, of 40% of the business
Pound dips to 14-month low as bond sell-off piles pressure on Rachel Reeves
The pound briefly fell to a 14-month low against the US dollar on Thursday morning after the sell-off in the bond market fuelled investors’ anxiety about UK assets and piled further pressure on the chancellor, Rachel Reeves.Sterling extended recent losses against the US dollar, falling by a cent at one point, before recovering to trade half a cent down at $1.23.The sell-off in British government bonds – known as gilts – drove up the yield, or interest rate, paid to those holding them and therefore UK borrowing costs.However, comments by the chief secretary to the Treasury, Darren Jones, later on Thursday appeared to calm the market
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