The cost of government borrowing has experienced a decline, partially offsetting a surge that followed the chancellor’s emotional display in the House of Commons on Wednesday.
Yields on UK 10-year bonds decreased to 4.55%, a drop from the previous day’s close of 4.61%, as markets responded to the prime minister’s affirmation of working “in lockstep” with Rachel Reeves.
The pound, which had weakened on Wednesday, rebounded to $1.3668, although it has not fully recovered its losses.
According to one analyst speaking with the BBC, financial markets appear to be supporting the chancellor, fearing that her departure could weaken control over government finances.
“It seems to me this is a rare instance of financial markets actually bolstering the career prospects of a politician,” Will Walker Arnott, head of private clients at Charles Stanley, stated on the BBC’s Today program.
“The markets are concerned that if the chancellor leaves, fiscal discipline would follow, leading to larger deficits.”
Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, cautioned that market volatility is likely to persist.
“Once a risk premium is introduced into the marketplace, it’s very difficult to remove,” he noted on the Today program.
“I anticipate some moderation, but a return to the levels of 24 hours ago is unlikely.”
Fluctuations in bond yields are significant as they can influence the mortgage market, with higher yields potentially increasing the cost of mortgage deals.
Changes in bond yields, particularly five-year yields, can impact swap rates, which lenders use to determine pricing for new fixed mortgage deals.
This connection was particularly evident following the mini-budget during Liz Truss’s premiership.
Recently, mortgage rates have remained stable, with lenders implementing minor reductions to attract customers.
Reeves’s emotional reaction occurred during Prime Minister’s Questions on Wednesday, following the government’s reversal of plans to cut billions of pounds through welfare reforms.
This policy reversal leaves an almost £5bn deficit in Reeves’s financial plans.
The initial rise in borrowing costs stemmed from concerns about the chancellor’s potential resignation, suggesting market support for her position.
A Treasury spokesperson later attributed the chancellor’s distress to a “personal matter.”
On Wednesday evening, Prime Minister Sir Kier Starmer expressed his support for Reeves on BBC Radio 4’s Political Thinking with Nick Robinson, stating that he worked “in lockstep” with her and that she was “doing an excellent job as chancellor.”
Speaking to the BBC on Thursday, Reeves acknowledged her emotional state during PMQs but attributed it to a personal issue she declined to discuss.
She was also questioned about potential tax increases.
“Of course, the welfare changes Parliament voted through this week have a cost, which will be reflected in the Budget,” the chancellor responded.
She also reaffirmed her commitment to her fiscal rules, emphasizing that “we’ll be sticking to those because they’re absolutely vital for the living standards of working people and also the costs that businesses face.”
One of Reeves’s fiscal rules mandates that day-to-day spending be funded by government revenue, primarily taxes, with borrowing reserved for investment purposes.
Jane Foley, head of FX strategy at Rabobank, noted that the “gutting” of the welfare bill complicates the chancellor’s task, as the “savings that she had planned for will not be forthcoming.”
Consequently, Reeves faces the options of raising taxes, cutting spending elsewhere, or issuing more government debt, each of which faces opposition from various quarters, leaving the government “boxed in.”
“However, investors place significant value on political stability. Reeves has demonstrated an understanding of the importance of maintaining fiscal discipline, and it is unclear who would replace her and whether that person would have the same credibility within the investment community.
“Thus, Starmer’s demonstration of faith in Reeves has provided some reassurance to the market.”
The chancellor states she was dealing with a “personal issue” but is still “cracking on with the job.”
Rachel Reeves was visibly upset as Keir Starmer faced criticism from Kemi Badenoch regarding the welfare bill U-turn.
The chancellor’s financial flexibility has decreased following the scaling back of welfare reforms.
Regardless of the cause, Labour must soon begin projecting direction, confidence, and control.
Markets respond after a tearful appearance by Rachel Reeves in parliament following the welfare reform U-turn.