Bond markets calm despite government benefits u-turn
The cost of government borrowing has stayed flat on Friday morning despite the Starmer administration’s costly benefits U-turn blowing a £3bn hole in the UK’s precarious public finances.
Gilts – the name for UK government bonds – opened in a muted fashion across the curve. 10-year yields nudged down two basis points (bps) in early trades, as fixed income investors shrugged off fears the U-turn was a sign of the ministers struggling to keep a lid on public spending.
Bond prices, which move inversely to yields, fell more in the US and in Europe than Britain in what will be a relief to Rachel Reeves as she weighs up the government’s response to the U-turn to maintain her delicate fiscal headroom.
On Thursday evening, Keir Starmer caved to a fervent rebellion within his Labour party over the planned £5bn cuts to disability benefits his government announced as part of its Spring Statement.
It has left the Chancellor, who renewed her Treasury’s commitment to its “ironclad fiscal rules” in this month’s Spending Review, facing the unsavoury prospect of having to announce another set of sweeping tax rises in the next Budget in the autumn.
The rules commit the government to bring day-to-day spending in line with revenue on a rolling three-year period. If Reeves opts to stick with them, she will have little choice but to raise revenue or cut other areas of spending in the Autumn, having announced several unfunded spending commitments in recent months.
On top of Thursday’s decision to soften its welfare overhaul, which among other reforms promised to tighten access to personal independence payments (PIPs) and universal credit, Starmer has also announced a £1.5bn u-turn to winter fuel payments.
Additionally, the Office for National Statistics revealed last week that the recent decision to take control of British Steel from its Chinese owners will take a £900m chunk out of the public finances.
Together, the choices represent a £5.5bn hit to Reeves’ fiscal headroom – over half of the historically low £9.9bn buffer she gve herself in the Spring – which may be further hit if the ONS is forced to revise its optimistic growth outlook for the UK economy in the Autumn.
But the tranquil response to the trio of unexpected spending commitments among bond investors will represent a sliver of good news for Chancellor.
10-year gilts yields were fluctuating around 4.83 per cent – lower than their three-month average – while 10-year Treasuries for US government debt are up 36 basis points in the day’s trading.
Neil Wilson, UK investor strategist at Saxo, attributed the absence of any sudden jumps to the fact it is “not that big an amount in the grand scheme of things”.
He told CityAM: “I do think that the market will slowly digest the fact that the government is losing fiscal credibility, losing its ability to govern the way it wants and cannot take even quite modest decisions on getting the finances in shape.”
“It’s a mess and we will see it play it in due course – but we have to also look at the global picture and lower US yields as markets look to price in cuts…so there is a global dynamic to today’s moves,” he added.