LONDON (Reuters) -British government bond prices fell by the most since October 2022 and the pound tumbled on Wednesday, after finance minister Rachel Reeves appeared visibly distressed in parliament, a day after the government sharply scaled back plans to cut benefits.
The yield on the 10-year government bond, or gilt, rose as much as 22 basis points on the day at one point to around 4.68%, as investors ditched UK debt.
That would be the largest one-day jump in the British benchmark yield since October 2022, in the aftermath of then-Prime Minister Liz Truss’ mini-budget that cost her premiership.
The pound dropped by over 1% to $1.3589, while domestic mid-cap stocks tumbled.
COMMENTS:
LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER, LONDON:
“The spike in gilt yields is seemingly a response to signals that have been taken by some to suggest that Rachel Reeves’ job may be at risk – though the government has since said her tearful appearance in this afternoon’s PMQ’s was due to a personal matter. The rise in yields implies investors would be nervous if she were to go. Despite the regular criticism levied in her direction, unwavering commitment to her fiscal rules have generally been welcomed – in sharp contrast to the unfunded pledges from the Truss government.
A sudden departure would be likely to prompt questions about the government’s commitment to this approach, particularly in light of the recent U turn on planned cuts to welfare spending.”
MOHIT KUMAR, CHIEF FINANCIAL ECONOMIST EUROPE, JEFFERIES, LONDON:
“The UK government faces a difficult choice. We have a negative view on the UK fiscal picture. Our view of growth is much lower than the official OBR forecasts (we are looking at 1-1.2% growth in the UK for the next three years, vs 1.7-1.9% which is the OBR forecasts). Lower growth will make the Chancellor’s fiscal plans unrealistic. Even if we get higher taxes, we do not think that raising taxes will give as much revenue as the government would be hoping for.
Thus the government would need hard choices in order to bring the deficit picture in line. Recent market reaction reflects the market concerns on the credibility of the government to bring down fiscal deficits.”
GORDON SHANNON, PORTFOLIO MANAGER, TWENTYFOUR ASSET MANAGEMENT, LONDON:
“(The welfare U-turn) is signalling that the Labour Party is a lot less concerned about what the gilt market thinks.”
“I would have thought it was seared into politicians’ memories what happened to Liz Truss.”
“I continue to view it as you’ve breached your own commitments and that sets fire to your credibility in a world where there is increasing focus on the solvency positions of governments.”
