UK bonds suffer biggest sell-off since October 2022

London — British government bond prices fell by the most since October 2022 and the pound tumbled on Wednesday, after chancellor of the exchequer Rachel Reeves appeared visibly distressed in parliament, a day after the government sharply scaled back plans to cut benefits.

Reeves has repeatedly emphasised her commitment to fiscal rules, limiting the amount Britain will borrow. Analysts said the market moves reflected fears that she would be replaced, creating even more uncertainty.

The yield on the 10-year government bond, or gilt, rose as much as 22 basis points (bps) on the day at one point, to 4.681% , 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’ chaotic fiscal announcement that cost her premiership.

The sell-off hit the entire gilt curve. Thirty-year yields rose nearly 22 bps, and two-year yields rose 11 bps.

Shaken

“Gilt yields were moving up but started to spike during (prime minister’s questions) as Reeves looked utterly shaken,” said Neil Wilson, UK investor strategist at Saxobank.

British Prime Minister Keir Starmer’s press secretary later said Reeves has his full support, and she was upset because of “a personal matter”.

Investors are watching her position after the British government’s U-turns on welfare reforms mean the plans will no longer save taxpayers any money and have shredded the margin Britain relies on to meet its fiscal rules, analysts said on Wednesday.

“The market is pricing in the possibility of a replacement chancellor with a more left-leaning agenda, which is spooking the bond market and waking up the bond vigilantes from their slumber,” said Kathleen Brooks, research director at XTB

Tears

Sterling dropped by more than 1% against the dollar and set for its largest one-day decline since mid-June. It also weakened sharply against the euro, after Reeves appeared to wipe away tears. The pound was down 1% on the dollar at $1.361 during the afternoon. The euro was up 0.6% at 86.4p. That would be the euro’s largest one-day rise against the pound in two months.

Britain’s domestically focused mid-cap index was down 1.65%, sharply underperforming European stocks.

“It’s about Rachel Reeves finding herself in a very difficult situation following a series of U-turns, which means that the savings that had been anticipated ... [are] not going to be had,” said Dani Hewson, head of financial analysis at AJ Bell.

“What’s gone on in parliament today has absolutely unsettled [investors] because what is happening is the market is becoming increasingly concerned with Reeves’ position.”

Reuters