UK Bond Rout Abates as High-Stakes Budget Week Draws to a Close
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(Bloomberg) -- A sharp selloff in UK bonds that sent borrowing costs to their highest in a year abated Friday as a weak jobs report in the US boosted demand for global debt.
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After gilts initially slipped a third day in a rebuke of Labour’s plans for higher borrowing and spending, the bond market stabilized as signs of deterioration in American payrolls boosted the case for interest-rate cuts to support the world economy.
That left the yield on benchmark 10-year gilts at 4.45% — 21 basis points higher than five days ago. That’s the largest weekly rise since January, with both Moody’s Ratings and S&P Global painting a gloomy picture of the UK’s fiscal outlook.
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It’s hardly the reaction that Rachel Reeves would have wanted — or expected — for her first budget as Chancellor of the Exchequer. After signposting almost all of Labour’s big-spending budget in advance, there was little to rock markets in the announcement itself.
But projections from the Office for Budget Responsibility for higher inflation and fewer interest-rate cuts as a result of Labour’s plans, along with turbocharged bond sales to finance them, prompted a revolt in bond markets that quickly spread to stocks and the pound.
Reeves sought to reassure the financial markets on Thursday with a pledge of “economic and fiscal stability” in an interview with Bloomberg TV. Still, comparisons with the September 2022 gilt meltdown that followed then-prime minister Liz Truss’ botched mini-budget were unavoidable — particularly given Labour has sold itself as an antidote to the years of financial and political turmoil of previous governments.
“It seems the UK bond market is still caught in a case of ‘post-Truss stress disorder,’” said Stefan Koopman, senior macro strategist at Rabobank. “The second it’s faced with a bit of uncertainty and unfamiliar territory, investors are playing it safe: de-risk first, ask questions later.”
While the moves are much more contained this time round, they underline the gilt market’s fragility and show how little room for error Labour have as they try to revive the country’s sluggish economy.
UK’s Reeves Seeks to Calm Markets After Post-Budget Selloff