Rachel Reeves found himself stuck between Liz Truss, Donald Trump and Labour MPs. This week, the bond market showed what a troublesome place it was.
Since the general election that reclaimed the workforce a year ago, Reeves has been tasked with providing the impossible. Somehow, to balance the book, she either cuts her spending (the many MPs in the party and the vulnerable components they represent), raises personal taxes (violating the manifesto pledge), or borrowing (tests bondholders’ patience). Rather, she is more than me.
The lively scenes in the UK market show how tightly the corners she portrayed herself in recent markets. The welfare reform bill, which she has defended for months, with massive, rather ham-fisted benefits cuts, faced a major uprising from lawmakers in her own party, and had to be seriously dehydrated.
It all came to mind in Congress Wednesday. Prime Minister Kiel immediately stopped pledging his merciless support. She appears tired and visibly upset. (Yes, that nickname is worse than Philip Hammond’s “Spreadsheet Fill.” If you don’t know why, I recommend asking you a few women.)
The exact cause of her pain is unknown and frankly, our business is not. But the de facto financial markets were surprised by the notion that she might not have long been in office, or that bondholders might end like the putty here, but did not stick to find out.
Sterling, flying high this year thanks to a dollar slide, fell 0.8% a day and was hit. Even more worrying, the UK government bonds have become monkey agged. Prices have fallen along the currency (a worrying pattern generally reserved for emerging markets), creating an increase in long-term debt yields that approach the same league as the crisis in late 2022.
To be clear, this week’s wobble was not even serious in its famous truss moment. It wasn’t a full-scale crisis of confidence, the surge in yields was short and not noticeable, and it didn’t cause a secondary explosion, as did the truss’ unlucky spending plans in the pension industry at the time. There was no need to stimulate the Bank of England crisis response team, and some large investors were willing to buy the dip.
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But the entire episode shows just how dark the shadows are being made by Truss almost three years after the six-week stint when the Prime Minister finished. The UK government bond holders are still rather hurt by the crisis, and, as we saw this week, are quickly hidden in case of a re-run. This is simply too small and a bond market, and Sterling is far too under the list of reserve currencies to absorb the troublesome shock.
Trump appears in this already unsettling picture due to his own luxurious borrowing and spending plans. Long-term borrowing costs everywhere from Japan to the UK for months indicate that investors are tired of the government using it as a low-cost cash machine.
We saw in January that the rise in US government bonds would lift the rest of the market together with them. If the US president continues to lead a long-term portion of the market, like recently, borrowing costs continue to rise all over the world, including in the UK, leaving Reeves with more control.
“We’ve seen a lot of effort into making our customers more comfortable,” said Neil Mehta, portfolio manager at RBC Bluebay Asset Management. “The market will be vigilant in the coming months.”
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What can you break this curse and avoid this ugly consequence for Reeves? Investors say the answer is vision and reliability. They don’t care much about who is the Prime Minister as long as the plan makes sense, and they have no patience with Shambolic’s policy decisions. “It was a rebellion against the lack of discipline around the path to advance,” said Sonja Loud, chief investment officer of Law & General’s Asset Management. “Why invest? Because I believe there is a plausible growth strategy.”
Germany, for example, can draw investors into long-term debt. Because they sell justifications to remove the brakes from harsh fiscal policies in the end. For investors, there is no similar starting point or the same luxury in the UK, so there is a need for a stronger narrative. “The psychology here is trust,” Loud said. “It’s not a policy, it’s the fact that you’re damaging yourself.”
In the market, exchanging Reeves for an alternative prime minister would probably make little positive difference, assuming that unaddressed policymaking has been endured. If a beginner misspokes or angers a bond market overlord, it can make the problem even worse. Atmosphere and messaging are less important to the market than cold, hard economic data, but it is not. Reeves and Starmer time is somehow short to gain confidence, both on the trading floor and on the backbench.
katie.martin@ft.com
