British government bonds and the pound on the morning of July 3 were recovering losses after a sell-off the previous day. Investors were alarmed by the threat of a possible resignation of the finance minister, who was seen in tears in Parliament, and the arrival of a new, more compromising official willing to increase borrowing. The market reaction led the prime minister to say he had no plans to change the head of the Treasury. However, economists now warn that the government will face difficulties in budget planning and may be forced to raise taxes;

Details

U.K. government bonds rose in value on Thursday after Prime Minister Keir Starmer said Rachel Reeves will remain head of the Treasury "for a very long time," allaying investor fears over the threat of her resignation, notes the FT. 

At the beginning of trading on Thursday, the yield on 10-year Eurobonds decreased by 0.08 percentage points to 4.54%. On the previous day, the yields of these bonds jumped by 0.16 p.p. due to the sell-off, which was the largest one-day movement since April.

The pound, which fell 0.8% against the dollar on Wednesday, also recovered and was trading at $1.3670, adding 0.3%.

Context

The sell-off in British securities on July 2 was triggered by an emotional scene in the House of Commons, one of the chambers of the British parliament. There on Wednesday, Prime Minister Keir Starmer defended welfare reform designed to save 5.5 billion pounds ($7.5 billion) by 2029. During the session, opposition Conservative Party leader Kemi Badenoch, who opposes benefit cuts, questioned whether Finance Minister Rachel Reeves would be able to keep her post until the next election. Starmer responded that Badenoch herself would be out of office by the election, but did not directly speak in favor of the finance minister. The debate was streamed online, and by the end of the session, it was noticeable that Reeves, who was sitting next to the prime minister, looked visibly upset and was brushing away tears.

Traders were alarmed that Reeves, known for her discipline over public finances, could lose her post and her potential successor would loosen controls on government spending and increase borrowing, wrote Bloomberg. The sell-off has resulted in a £3 billion drop in British market capitalization, writes The Telegraph. One MP said it was "one of the most expensive tears in history", notes the FT.

Reeves has repeatedly emphasized her commitment to strict budgetary principles. She insists that day-to-day public spending should be funded by taxation, not borrowing. She has come under pressure over plans to cut spending on welfare benefits, with Labor Party MPs  saying the most vulnerable in society would suffer from the reform. As a result, in order to win the support of MPs, the government was forced at the last minute to remove from the controversial reform measures that could lead to savings in the long term. In particular, the government abandoned a plan to make it harder for people with health problems to claim benefits;

The concessions blow a hole in Reeves' budget, said Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, to Reuters. Combined with other earlier measures, he said, the 9.9 billion pounds ($13.6 billion) budget reserve was "virtually exhausted."

  "The softened bill will save nothing over the next four years," agreed Helen Miller, director of the Institute for Fiscal Studies think tank. Opposition politicians and economists have warned that the government will now have to raise taxes or cut spending in other areas to balance the annual budget at the end of this year. ;

To reassure investors, Starmer told the BBC on the evening of July 2 that Reeves "will be chancellor for a very long time" and her tears in parliament were due to a "personal problem" unrelated to politics. Her team has said she has no intention of resigning.

This article was AI-translated and verified by a human editor

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