UK bond rout bruises Truss as public finances rattle investors

British government bonds tumbled sharply on Wednesday as a tearful appearance by Chancellor Rachel Reeves in parliament a day after the government backed down on its welfare reforms reignited concern over Britain’s finances.

Reeves was attending Prime Minister’s Questions on Wednesday following the government’s decision to sharply scale back plans to cut benefits. The sharp plunge in British assets immediately drew comparisons with Liz Truss’ short-lived premiership nearly three years ago, which was derailed by a bond market selloff.

Investors are monitoring Reeves’ status after the British government’s reversal on welfare reforms meant the plans would no longer save taxpayers any money, shredding the margin Britain relies on to meet its fiscal rules.

The welfare reform U-turn was “signalling that the Labour Party is a lot less concerned about what the gilt market thinks,” said Gordon Shannon, portfolio manager, TwentyFour Asset Management.

“I would have thought it was seared into politicians’ memories what happened to Liz Truss.” The yield on the 10-year government bond, or gilt, rose as much as 22 basis points on the day at one point, to 4.681% , as investors ditched British debt. It then recovered somewhat to 4.60%.

At its peak, the benchmark yield was set for its largest one-day jump since October 2022, the aftermath of Truss’ chaotic package of large, unfunded tax cuts that scuttled her premiership. During the depths of the 2022 crisis, the yield on the 10-year gilt rose by 50 bps in a single day at one point.

The selloff also hit very long dated gilts, and 30-year yields rose 17 basis points.

“The latest headline would suggest more uncertainty with regards to the current government,” said Simon Blundel, head of European fundamental fixed income investments at BlackRock.

“It’s another thing for us to look at and position for,” he said, though he added that BlackRock had generally taken a positive stance towards gilts and the market was not as vulnerable as it was in 2022, when turmoil in Britain’s pensions sector exacerbated moves.

Investors in bonds around the world are growing increasingly nervous about government deficits from Japan to the United States, with Britain seen as among the more vulnerable.

Earlier on Wednesday, British assets were trading slightly lower, but the selloff intensified rapidly after Reeves appeared alongside Prime Minister Kier Starmer during the weekly prime minister’s questions looking exhausted and upset.

Traders also focused on comments from Starmer seemingly not endorsing Reeves, though Starmer’s press secretary later said Reeves has his full support, and she was upset because of “a personal matter”.

Reeves has repeatedly emphasised her commitment to self-imposed fiscal rules, limiting the amount Britain will borrow, and, analysts said, Wednesday’s market moves reflected fears that she would be replaced, creating even more uncertainty.

“The gilt market is largely concerned that a new chancellor will rip up Reeves’ fiscal rules and go for excessive unfunded borrowing. Combine that with a plan that has not delivered or is unlikely to deliver much growth or productivity gains, then it looks a very risky strategy to adopt!” Craig Inches, head of rates and cash at Royal London Asset Management, said.

Reeves has also been blamed by some Labour members of parliament for pushing for billions of pounds of savings that were described as cruel and targeting the most vulnerable.

Sterling dropped around 1% against the dollar and also weakened sharply against the euro, which rose 0.8% to its highest on the pound in two months.

Britain’s domestically focused mid-cap index was down 1.3% on the day, sharply underperforming European stocks.

“The deficit is going to have to be closed somehow, clearly the signal from yesterday is that can’t come from substantial spending cuts, I don’t think it’s possible for the government to borrow the money, that leaves tax rises,” Nick Rees, head of macro research at Monex Europe, said.

“It’s a pretty ugly outlook for sterling.” US crude oil and gasoline inventories rose unexpectedly last week as both exports and demand fell sharply, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories rose by 3.8 million barrels to 419 million barrels in the week ending June 27, the EIA said, compared with analysts’ expectations in a Reuters poll for a 1.8 million-barrel draw.

Crude stocks at the Cushing, Oklahoma, delivery hub fell by 1.5 million barrels.

Oil prices pared earlier gains following the unexpected build in inventories, which was also in part driven by higher imports.

Agencies