UK bonds suffer biggest selloff since October 2022 as worries build over finance minister

 

British government bonds experienced their sharpest selloff since October 2022, driven by growing uncertainty over Finance Minister Rachel Reeves’ position. On Wednesday, bond yields surged across all maturities, with the 10-year gilt yield rising as much as 22 basis points to 4.681 percent. This marks the steepest daily jump since the aftermath of former Prime Minister Liz Truss’s damaging fiscal plans. The 30-year yield climbed nearly 22 basis points, and the 2-year increased by 11 basis points.

The market reaction came as Reeves appeared visibly emotional during Prime Minister’s Questions, just a day after the government reversed key welfare reforms. These reforms had been expected to reduce spending, supporting the government’s fiscal targets. Their abandonment leaves a significant gap in projected savings, undermining confidence in the UK’s economic management.

Reeves has built her credibility on adhering strictly to fiscal rules. Investors are now concerned that her position may be in jeopardy, potentially opening the door to a successor with less market-friendly policies. Some analysts suggested the selloff reflected growing expectations of a more left-leaning replacement.

Neil Wilson of Saxobank noted that gilt yields began spiking when Reeves appeared visibly shaken in Parliament. The concern, according to analysts, is not just over fiscal policy reversals but also the broader signal of instability at the top of the Treasury. Although Prime Minister Keir Starmer reaffirmed Reeves' position and attributed her visible distress to a personal issue, the markets reacted strongly. The swift and intense move in bond yields suggests investors are deeply uneasy about the UK’s fiscal direction, especially in the face of backpedaling on cost-saving reforms.

The return of bond market volatility also raises fears of renewed pressure from so-called “bond vigilantes” who punish fiscal slippage with higher borrowing costs.

See also: UK PM gives full backing to Reeves after she appeared upset in parliament

Sterling suffered its worst one-day fall in more than two weeks, dropping over 1 percent against the dollar to $1.361 and weakening 0.6 percent against the euro to 86.4 pence. The euro’s gain marked its largest single-day rise against the pound in two months. The currency drop paralleled the turmoil in the bond market and reflected broader market concerns surrounding the UK’s economic policy direction.

The trigger was Finance Minister Rachel Reeves' visible emotional distress in Parliament, which came a day after the government reversed plans to reform welfare benefits. Those U-turns effectively eliminated a key source of planned fiscal savings, threatening the government’s ability to stick to its self-imposed borrowing limits.

With markets already on edge, Reeves’ tears were interpreted as a sign of deeper internal tensions and possibly her own vulnerability within the government. Analysts warned that her departure or diminished influence could usher in a more radical or less fiscally disciplined replacement  a scenario that spooked both currency and bond investors.

Kathleen Brooks, research director at XTB, said the bond market was pricing in the risk of a new chancellor with a softer stance on fiscal control. “The bond vigilantes,” long dormant, are waking up, she added, reacting to what they see as the breakdown of economic discipline.

The uncertainty also weighed heavily on UK equities, particularly the domestically focused FTSE 250 index, which dropped 1.65 percent  underperforming other major European markets.

According to Dani Hewson at AJ Bell, Reeves has been put in an impossible position by successive government reversals, and the loss of expected savings has left investors rattled.

Despite assurances from Prime Minister Starmer that Reeves has his full support, markets remain wary. The political drama has clearly touched investor nerves, with potential long-term consequences for the UK economy.