Markets turn on Rachel Reeves as sterling and UK debt is sold off

Markets turned on Rachel Reeves yesterday as fears grew over the impact of her Budget borrowing binge.

The pound sank and traders dumped UK bonds – known as gilts – in a sell-off that drew unwelcome comparisons with Liz Truss and Kwasi Kwarteng's disastrous mini-Budget two years ago.

The sell-off, which gathered momentum throughout the day, sent UK government borrowing costs to their highest level for a year, adding to the volatility seen in the hours after the Budget on Wednesday.

It was a painful day for the pound, which sank close to $1.28 versus the US dollar, its lowest level since August.

The FTSE 100 took a hit too, with blue-chip housebuilders Persimmon and Taylor Wimpey each falling 7 per cent on fears that interest rates may stay higher for longer.

It prompted the Chancellor to try to reassure financial markets in an interview with markets-focused TV channel Bloomberg.

Ms Reeves insisted 'economic and fiscal stability' were her government's number one commitment and that public finances were on a 'stable and solid trajectory'.

It came after Ms Reeves unveiled plans to increase borrowing by £32.3 billion a year on average over the next five years – as well as ramping up taxes.

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Markets fear that the £162 billion total splurge will help stoke inflation, reducing the likely pace of Bank of England interest rate cuts. 

Traders are now betting that there will be just one more cut this year – expected to take place next week – but that a pre-Christmas December cut is unlikely.

Before the Budget, two quarter of a percentage point cuts had been expected.

The sheer scale of the extra borrowing required to fulfil the Chancellor's plans is also concerning investors. 

Together with the prospect of slower rate cuts, that has helped push up yields on gilts. Higher gilt yields add to the cost of government borrowing.

Lacklustre economic forecasts published alongside the Budget, together with a tax raid on businesses, have also helped take the sheen off investors' view of Britain.

Yields were as low as 3.75 per cent in mid-September but started rising as the government laid the path to tweaking its debt rules so it could borrow more. When the Chancellor delivered her Budget on Wednesday, they were at around 4.2 per cent.

But yesterday they surged above 4.5 per cent to hit the highest level in a year and within touching distance of the 4.6 per cent seen in the wake of the Truss debacle. Later, however, yields fell towards 4.4 per cent.

Neil Wilson, chief market analyst at Finalto, said: 'Gilts are being hammered and now sterling too – it is a 'sell the UK' trade in the wake of that deranged Budget. 

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'The government is going to borrow a lot more and spend a lot more; but growth will be worse. 

'It's hard to see the Budget as anything other than disaster for economic growth.'

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: 'Initial financial market reaction was sanguine, but investors appear to have taken flight after picking over the bones of the huge tax and spending plans.'

Experts at Deutsche Bank yesterday drew comparisons with the Truss mini-Budget in 2022. 

Ms Reeves's Budget 'had £32 billion of unfunded commitments', Deutsche Bank said in a note to clients, referring to the additional annual amount that will have to be paid for by borrowing.

That meant it was 'probably two-thirds of the Truss mini-Budget'.