Bond markets were sent into turmoil and the pound tumbled after the Chancellor’s tears in the Commons – drawing comparisons with the chaotic reaction to Liz Truss’s disastrous mini Budget.
UK ten-year borrowing costs surged close to 4.7 per cent as Sir Keir Starmer refused to offer Rachel Reeves his backing as she sat beside him at Prime Minister’s questions.
The pound fell by one per cent against the dollar to less than $1.36.
Traders are likely to be anxious that even after Ms Reeves’ dismal stewardship of the economy, any Labour replacement could bring more uncertainty to the public finances.
The spike took yields on ten-year government bonds – effectively the rate investors charge to lend to the government – to the highest level in nearly a month.
And the one-day movement was the worst since October 2022, after the Truss mini-Budget.
Traders were already on edge after Labour’s humiliating climbdown on welfare which blew a £5 billion hole in the Chancellor’s Budget plans.
And though bond yields came down closer to 4.6 per cent – after the PM finally offered his backing and the Chancellor’s tears were described as a personal matter – they were still well above the levels seen at the start of the day.
Neil Wilson, UK investor strategist at Saxo Markets, said: ‘Is Liz Truss back? Hard to imagine the chancellor will last much longer.
‘She will pay the price for sticking to her fiscal rules and having a party that won’t let her do so without hiking taxes because they refuse to grasp the benefits nettle.
‘The market is turning vigilante here and showing a distinct lack of confidence and implication that we could see more borrowing; pricing in higher political risk premium.
‘This kind of market reaction is everything Labour hoped to avoid – they staked so much on their fiscal credibility but it’s all gone up in a backbench revolt.’
Kathleen Brooks, research director at XTB, said: ‘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.’
Nigel Green, chief executive of financial advisors deVere Group, said: ‘The echoes of Truss in 2022 are unmistakable.
‘Back then, it was a reckless mini-budget that shattered market confidence. This time, it’s a government lurching from one policy retreat to another, raising serious doubts about fiscal control and political authority.’
