UK Markets Rebound as Chancellor Reeves Gains Confidence Amidst Fiscal Shifts

UK borrowing costs have seen a significant fall, partially reversing a recent surge that followed Chancellor Rachel Reeves’ emotional appearance in the Commons earlier this week. The yield on UK 10-year bonds dropped to 4.55% from 4.61% at the previous day’s close, as markets reacted positively to Prime Minister Sir Kier Starmer’s assurance that he works “in lockstep” with Reeves.

The pound also saw a recovery, rising to $1.3668, though it has not fully regained its earlier losses. Analysts suggest that financial markets are actively supporting the Chancellor, fearing that her departure could lead to a weakening of control over government finances. Will Walker Arnott, head of private clients at Charles Stanley, noted that this appears to be a rare instance where markets are bolstering a politician’s career prospects, driven by concerns that fiscal discipline might erode if Reeves were to leave.

Despite the current easing, Mohamed El-Erian, chief economic adviser at Allianz, warned that markets are likely to remain sensitive. He explained that once a risk premium is introduced into the market, it is difficult to remove completely, suggesting that while some moderation is expected, a full return to previous stability may not occur immediately.

The movements in bond yields directly impact individuals, particularly through the mortgage market, where higher yields can lead to more expensive mortgage deals. Fluctuations, especially in five-year bond yields, influence swap rates used by lenders to price fixed mortgage deals. This was clearly demonstrated during the Liz Truss premiership’s mini-budget aftermath. Mortgage rates have recently been stable, with lenders making minor cuts to attract customers.

Reeves’ emotional moment occurred during Prime Minister’s Questions on Wednesday, following the government’s U-turn on welfare reforms, which introduced a nearly £5bn deficit in her financial plans. The initial rise in borrowing costs was linked to speculation about her potential resignation, which paradoxically indicates market support for her. A Treasury spokesperson clarified that her distress was due to a “personal matter.” Prime Minister Starmer publicly backed Reeves on Wednesday evening, affirming her excellent performance as Chancellor.

Speaking on Thursday, Reeves acknowledged her upset at PMQs but reiterated it was due to a personal issue she would not discuss. When questioned about potential tax increases, she confirmed that the cost of the welfare changes voted through Parliament would be reflected in the upcoming Budget. Reeves also reaffirmed her commitment to fiscal rules, deeming them vital for living standards and business costs.

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