Rachel Reeves says she has ‘iron grip’ on finances as borrowing costs surge | Gilts

Rachel Reeves took the rare step of issuing a public statement for the second successive day on Wednesday, insisting she has an “iron grip” on the public finances, as the sell-off in bond markets intensified.

The cost of 10-year government borrowing hit its highest level since the global financial crisis in 2008, jeopardising the chancellor’s chances of meeting her self-imposed fiscal rules.

A Treasury spokesperson said: “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.”

They added that the chancellor would “leave no stone unturned in her determination to deliver economic growth and fight for working people”.

Analysts have warned that by pushing up government borrowing costs, the market moves could wipe out the £9.9bn headroom Reeves left herself against the fiscal rules in October’s budget. However, the spokesperson insisted this was “pure speculation”.

Investors blamed Wednesday’s renewed jump in bond yields – which move in the opposite direction to prices – on concerns about the government’s tax and spending plans, and anaemic economic growth.

The pound also fell, in another sign of anxiety. Sterling fell to its lowest level against the dollar since April last year and the domestically focused FTSE 250 stock index fell to an eight-month low.

Brad Bechtel, global head of foreign exchange at Jefferies, said the sell-off in the pound showed the UK was seeing a “micro version” of the bond market meltdown witnessed after Liz Truss’s 2022 mini budget.

“UK gilts continue to melt down and that has so far not impacted the currency as much as it did during the Liz Truss episode, that is until today. The pound seems to be reacting to gilts more and more and that means we are spilling further and further into fiscal emergency territory,” he said.

The yield, or interest rate, on UK 10-year government bonds, or gilts, climbed again on Wednesday, adding to its rise on Tuesday. It reached 4.825%, the highest level since the global financial crisis more than 16 years ago.

That was up from 4.679% the previous day, and 4.2% at the start of December. The yield on 30-year gilts, which hit a 26-year high on Tuesday, continued to rise too.

Sterling lost a cent and a half, or 1.2%, to trade at $1.232, its lowest level since April 2024 against the dollar, which has rallied as investors worry the US Federal Reserve would not cut interest rates as swiftly as hoped this year.

Kathleen Brooks, research director at XTB, said: “The UK is looking like an outlier and is in the sights of the bond vigilantes. It feels like the UK is in a tricky spot.”

She added that the markets’ focus on the UK could continue for some time, with the latest inflation data due next week.

The independent Office for Budget Responsibility (OBR) is preparing a new economic forecast, which Reeves has said she will respond to in the House of Commons on 26 March.

With the treasury insisting there will not be further tax increases in the spring, the chancellor could opt to make spending cuts to ensure the forecast shows her rules being met.

Paul Johnson, director of the Institute for Fiscal Studies, said: “What’s happened in bond markets since the budget is roughly speaking enough to wipe out the very small amount of headroom Rachel Reeves left herself.”

Without tax increases, he said, “the only thing that can take the strain in any of this is your spending numbers”.

Reeves’ spending plans after 2025-26, “are already very tight, at 1.3% a year, which implies at best freezes for most departments”, he added.

“Just take that down below 1.3% and that looks really tough. It’s going to be quite a bloody cabinet battle if that’s where we end up.”

The FTSE 250 index of medium-sized companies listed in the City dropped by 2% – its biggest one-day decline since last August.

The larger FTSE 100 index of blue-chip shares was flat, with shares in housebuilders and retailers falling but banks rising on the prospect that interest rates will stay higher for longer.