Closing summary
UK government bonds have sold off, pushing yields (or interest rates) up.
The yield on the benchmark 10-year gilt (as government bonds are known) jumped by 15 basis points to a one-year high of over 4.5% at one stage, as traders grew alarmed about Rachel Reeves’ big rise in borrowing to fund investment spending in yesterday’s budget. This means that the government is likely to issue more bonds.
The 10-year yield is now trading 10bps higher at 4.43%.
Interest rate expectations have also been scaled back, as the Office for Budget Responsibility judged that the budget was likely to raise inflation slightly. Before the budget, markets were expecting the Bank of England to cut rates from 5% to about 3.75% by the end of next year, with a first quarter-point move next Thursday. Now, they are forecasting fewer reductions, to around 4% by end of 2025.
However, analysts said today’s market moves could not be compared to the disastrous mini-budget delivered by Kwasi Kwarteng under Liz Truss in September 2022, when gilt yields jumped by 33 basis points in one day.
Thank you for reading. Take care – JK
Updated
Susannah Streeter, head of money and markets at the investment firm Hargreaves Lansdown, said:
Fresh nervousness has crept into markets about the prospects for the UK economy, just a day after Rachel Reeves delivered Labour’s first Budget for 14 years. Initial financial market reaction was sanguine, but investors appear to have taken flight after picking over the bones of the huge tax and spending plans…
The quiet optimism that appeared to be spreading during Rachel Reeves’ speech has evaporated and a higher risk premium has returned for UK debt. Bond yields are set to stay volatile, as institutions financing government borrowing keep a more suspicious eye trained on what the swollen investment budget will be spent on.
