Reports of a major tax policy reversal by Chancellor Rachel Reeves have triggered a significant sell-off in UK government bonds, raising fresh concerns over the nation's fiscal stability just weeks before the Autumn Budget.
Market Turmoil Following Tax Speculation
Speculation that the Chancellor has abandoned plans to raise income tax sent Britain's long-term borrowing costs sharply higher on Friday. Bond markets reacted negatively to the prospect of unfunded spending pledges, with experts warning the reported U-turn leaves Rachel Reeves scrambling to fill a substantial financial black hole.
The sell-off occurred against a backdrop of existing political uncertainty and disappointing economic data. Yields on 30-year UK government bonds, known as gilts, jumped as much as 14 basis points in early trading, marking one of the most significant moves since July. Similarly, the yield on 10-year gilts shot up by 12 basis points. It is crucial to understand that bond yields move inversely to prices, meaning this surge indicates falling bond values.
A Wider Climate of Economic Uncertainty
The bond market jitters were not an isolated incident. Sterling initially fell 0.3% against both the US dollar and the euro as political concerns about the upcoming Budget swirled. Although the currency later recovered to trade largely flat at $1.32 and €1.13, the initial reaction underscored market anxiety.
London's FTSE 100 Index also fell sharply, dropping around 100 points, or 1%, to 9706.9 in early Friday trading. This decline followed a weak lead from Wall Street, where worries over the sustainability of the AI and tech bubble resurfaced.
Kathleen Brooks, research director at XTB, commented on the situation, stating that the Budget reports "mean the Chancellor has signalled billions of unfunded spending pledges, which the bond market is not fond of." She highlighted the unwelcome bond market volatility with less than two weeks until the Budget on November 26, questioning whether the Chancellor might reverse course once again based on the market's reaction.
Expert Warnings of a Fiscal 'Doom Loop'
The pressure on gilts had been building throughout the week. A sell-off occurred on Wednesday amid rumours of a potential leadership challenge to Prime Minister Sir Keir Starmer. This was compounded on Thursday by disappointing GDP figures showing the economy grew just 0.1% in the third quarter.
Neil Wilson, UK investor strategist at Saxo Markets, provided a stark analysis of the dilemma. He explained that not raising income tax forces the government to "scratch around with a load of smaller things" that could further squeeze economic growth. "Moreover, the market thinks you lack credibility in terms of filling the black hole and raising headroom," Wilson said. He described this as a "doom loop scenario" where rising bond yields increase borrowing costs, creating an even larger fiscal gap.
By the close of trading, yields had eased slightly but remained elevated, with 30-year gilt yields standing seven basis points higher at 5.3% and 10-year gilt yields up six basis points at 4.5%. The situation leaves the Treasury facing a critical test of its fiscal credibility ahead of a highly anticipated Budget statement.
