The bond markets plunged into disarray and the value of the pound dropped sharply following the Chancellor's emotional display in the House of Commons—prompting parallels with the turbulent response to... Liz Truss ’s disastrous mini Budget .
Yields on UK government bonds soared towards 4.7 percent amid speculation over renewed market turbulence linked to Brexit-related uncertainties. Keir Starmer refused to offer Rachel Reeves He supported her as she took a seat next to him during Prime Minister's Questions.
The British currency dropped by 1% relative to the US dollar, falling below $1.36.
Traders may feel concerned that despite Ms. Reeves' poor management of the economy, replacing her with another Labour candidate could still create further instability for government finances.
The surge pushed yields on ten-year government bonds—which reflect the interest rate investors demand for lending money to the government—to their highest point in almost four weeks.
The single-day decline was the steepest since October 2022, following the Truss mini-budget announcement.
Markets had become increasingly anxious following Labour's embarrassing retreat on welfare reforms, an about-face that created a £5 billion shortfall in the Chancellor's budget strategy.
Although bond yields dropped nearer to 4.6 percent—after the Prime Minister eventually expressed his support and the Chancellor’s emotional display was labelled a private issue—they remained significantly higher than the rates recorded earlier in the morning.
Neil Wilson, United Kingdom-based investment strategist with Saxo Markets, asked: 'Has Liz Truss returned?' It's difficult to envision the chancellor remaining in office for an extended period.
She’ll face consequences for adhering to her financial principles and leading a party unwilling to support them unless taxes are raised, as they shy away from embracing the necessary reforms.
The market is taking matters into its own hands here, clearly signaling a loss of confidence and hinting at potential further borrowing—effectively factoring in an increased political risk premium.
This sort of market response is exactly what Labour aimed to prevent—they placed heavy emphasis on their financial responsibility, but it has all been undermined by a rebellion from within the party ranks.
Kathleen Brooks, the research director at XTB, stated: 'Investors are factoring in the chance of a new chancellor who may pursue a more progressive policy direction, causing unease in the bond market and prompting bond investors—who had been quiet—to become active again.'
Nigel Green, CEO of financial advisory firm deVere Group, stated: 'The parallels with Truss in 2022 are clear.'
Previously, it was an irresponsible small budget that undermined market trust. Now, it's a government moving unpredictably from one policy reversal to another, casting significant uncertainty over financial management and governmental credibility.
Read more