Bond market crisis spells biggest headache yet for Reeves
Chaos in the UK bond markets intensified today, with ten-year borrowing costs rising to their highest level since the 2008 global financial crisis, creating the biggest headache yet for Britain’s beleaguered Chancellor.
As a bond sell-off continues, the 10-year gilt yield climbed as much as 0.12 percentage points to 4.8 per cent in late-morning trade — its highest level since October 2008.
Meanwhile, the yield on the 30-year gilt - which yesterday rose to its highest level since 1998, surpassing the peak reached following Truss’s ill-fated “mini” budget - climbed again, meaning the government was today paying interest of 5.36 per cent on 30-year bonds.
The market movements have undermined confidence in the pound, with sterling falling 1.1 per cent against the dollar to $1.233, its weakest level since April.
Why are these developments so troubling for Rachel Reeves?
Because they mean that the cost of servicing government debt has increased. And, at the risk of stating the obvious, the more Reeves spends on servicing government borrowing, the less she has to spend on everything else.
Since October’s Budget, investor anxiety over higher UK borrowing, weak UK economic growth and stubbornly high inflation have all fuelled a sell-off in the bond markets.
Of course, the chaos isn't just stemming from Reeves’s Budget, much like - in fairness to the UK's former short-term PM - the 2022 bond market chaos wasn’t solely triggered by Britain’s experiment with Trussonomics.
This is part of a wider global story, with the cost of debt rising around the world, today in large part due to market anxieties over a second Trump presidency. The yield on the 10-year Treasury bond has been surging, with some investors warning that Trump’s inflationary tariff plans could lead to America’s own “Liz Truss moment”.
Despite these global factors, Reeves’s domestic critics will nonetheless argue that, with markets still jumpy about inflation and the cost of debt rising, she was reckless in the Autumn to change the fiscal rules and borrow as much as she did.
Now, the government is at risk of failing to reach its self-imposed Budget rules. Rules that the Treasury insists are “non-negotiable”.
Labour entered government heavily reliant on generating growth to ease the fiscal pressures it faced. But that growth has so far failed to materialise.
Reeves has also vowed not to repeat the giant set of tax rises announced in her Autumn Budget. Yet, unless growth improves, she will either have to renege on this promise or she will be forced to opt for the alternative: spending cuts. A politically costly option for a Labour government that has vowed to improve public services.
To make matters even worse for Labour, even as capacity to spend dwindles, spending demands are growing. Donald Trump is piling pressure on NATO countries to devote billions more to defence, repeating his demand yesterday that they increase spending to a whopping 5 per cent of GDP. The UK currently spends 2.3 per cent on defence.
At PMQs this afternoon, Kemi Badenoch had a chance to grill the Prime Minister. She focussed her line of questioning on the UK’s grooming gang scandal.
This backfired. Starmer handled her attacks relatively well, accusing her of only now taking an interest in the issue following Elon Musk’s X tirade, and using the extremely serious matter to score political points. The PM challenged Badenoch to tell MPs when she had ever before raised the topic, or demanded a national inquiry on the issue, in the Commons during her eight years as a member, including during her time as a children’s minister and women and equalities minister.
If Badenoch had really wanted to make Starmer uncomfortable at PMQs today, she should have focussed the session on the chaos in the bond markets. That is the real headache for Labour.
Caitlin Allen
Deputy Editor
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