It turns out the bond markets rather like Rachel Reeves as they contemplate her departure.
- The UK 10-year bond yield climbed around 0.16% on the day
- Today’s moves make it clear that the bond market won’t weather any deviation from the fiscal rules.
- It potentially raises the cost of borrowing at a time when Labour has little headroom
When the chips are down, you find out who your friends are. Chancellor Rachel Reeves’ tearful appearance at PMQs got the rumour mill turning: had she had a bust-up with Starmer? Was she about to be replaced? Briefing that it was a ‘personal matter’ satisfied no one and the gossip continued. But it turns out that bond markets are on her side.
Or, at least, they are not enamoured at the prospect of a less fiscally-prudent successor. The UK 10 year bond yield climbed around 0.16% on the day – from 4.46% to 4.62%. The UK 30 year gilt jumped 0.19% to 5.42%.
Reeves’ fate notwithstanding, this shows an important truth about UK borrowing – there is absolutely no wiggle room. The Chancellor has come under pressure to break her fiscal rules to fund, say, defence spending, or encourage growth, but today’s moves make it clear that the bond market won’t weather it.
This may ultimately be useful to Reeves, or her successor. It shows that the bond market is every bit as sensitive – and probably more so – than it was when Liz Truss launched her ill-judged fiscal event in 2022. It should also give pause to those tempted to believe promises from other parties to simultaneously cut taxes and raise spending. There is no magic money tree.
It is also an irritating distraction, potentially raising the cost of borrowing at a time when Labour has little headroom. The irony of this whole episode is that recent falls in the gilt yield would probably have given Reeves the headroom she needed to pay for at least some of the benefit rollback. Now her situation is worse than ever.
The crisis has at least laid out some cards. The bond vigilantes think Reeves is doing a decent job. They’re going to be very upset if anyone tries anything radical, and anyone who thinks we are not completely in thrall to bond market sentiment needs their head examined. The fiscal rules matter, and no Chancellor can be seen to be messing with them.
Most will sympathize with Rachel Reeves, or at least with the magnitude of her difficulties. There is not an inch of flexibility in the UK’s finances and every rebellion sets her sums back once again. She faces a tougher inheritance than almost any Chancellor in history. Maybe she was crying because Starmer forced her to stay.
