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UK government bonds faced their biggest one-day sell-off since the 2022 “mini” Budget after Sir Keir Starmer declined to back a tearful Rachel Reeves during Prime Minister’s Questions.
Starmer refused to say that the chancellor would remain in her post in a combative exchange on Wednesday with Conservative leader Kemi Badenoch following Labour’s dramatic gutting of its welfare bill, which abandoned a planned £5bn in savings.
Gilts slumped as investors grew increasingly nervous about the UK public finances, pushing the 10-year yield up 0.2 percentage points to 4.66 per cent, on course for the biggest one-day rise in borrowing costs since the market fallout from Liz Truss’s unfunded tax cuts three years ago. The pound dropped 1 per cent against the dollar and 0.6 per cent against the euro.
“There is a risk that a sell-off in gilts becomes self-reinforcing, if market fiscal worries are left unchecked,” said Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management.
Reeves, who sat beside Starmer during PMQs on Wednesday, appeared to shed a tear after the prime minister stopped short of giving her his full backing when asked about her future by Conservative leader Badenoch. She had entered the chamber looking visibly upset.
Starmer, who has previously publicly backed Reeves, said he was “thankful” for the chancellor but the absence of full-throated support increased speculation that her position is under threat.
A Labour spokesperson, asked why Reeves appeared distraught, said she had no comment and referred questions to the Treasury.
She added: “The chancellor is going nowhere. She has the prime minister’s full backing.”
Reeves has become a target for rebel anger over Labour’s handling of the welfare reforms.
Badenoch said the chancellor was being used by Starmer as “a human shield for his incompetence” and said that she looked “miserable”.
As PMQs ended, Reeves was ushered out of the chamber by her sister and fellow MP, Ellie Reeves, who is chair of the Labour party. She appeared to squeeze the chancellor’s hand as she guided her from the chamber.
The spokeswoman said the prime minister had previously said Reeves would serve as chancellor for the whole parliament. “He doesn’t have to repeat [that] every time.”
Asked whether Reeves had offered her resignation, the spokesperson said: “No.” She said Reeves and Starmer were getting on with delivering reform.
A spokesperson for Reeves said: “It’s a personal matter, which — as you would expect — we are not going to get into. The chancellor will be working out of Downing Street this afternoon.”
A spokesperson for Badenoch said: “The ‘personal matter’ doesn’t cover it. I think we should find out what’s going on.”
Asked what markets might make of the chancellor appearing to cry in the House of Commons, the Labour spokesperson said: “We don’t comment on markets.”
Pointing to the bond sell-off, Mike Riddell, a fund manager at Fidelity International, said: “The conclusion from the gilt price action this afternoon is that the market actually likes Rachel Reeves.”
Labour’s U-turn late on Tuesday managed to stop its welfare reform bill from being defeated, but required the prime minister to gut it of any measures that may have led to a net saving in the long run.
Reeves’ position is of huge interest to investors as she has pledged to abide by strict fiscal rules. But she is operating with minimal fiscal headroom and the government’s U-turn on welfare has blown a £5bn hole in her plans.
There is growing speculation she will need to increase taxes at the autumn Budget or pare back Labour’s spending plans — something that has become more challenging with backbench MPs increasingly aware of the sway they can exercise over the government’s agenda.
