UK bond markets experienced a sharp sell-off on Friday following reports that Chancellor Rachel Reeves has abandoned plans for a manifesto-breaking income tax increase in the upcoming autumn budget. The yield on 10-year government bonds, known as gilts, rose by over 0.13 percentage points to around 4.575%, the highest level in a month, marking the largest single-day increase since early July.
The pound also weakened against the US dollar, falling approximately 0.3% to $1.3155, as investor unease mounted ahead of the crucial budget scheduled for later this month. The FTSE 100 closed down more than 1% at 9,698, amid a global sell-off driven by concerns over the US economy.
The decision to scrap the income tax rise, first reported by the Financial Times, follows internal Labour Party disputes and threats of a backbench rebellion. Some analysts have linked the U-turn to increased political risk, with Berenberg senior UK economist Andrew Wishart stating, 'The U-turn demonstrates a lack of political competence which has probably led investors to increase the probability they attach to a change in the leadership of the Labour party.'
Investors had been anticipating that Reeves would break Labour's manifesto commitments to rebuild fiscal headroom, but the reversal has raised concerns about the government's commitment to fiscal sustainability. The Treasury is currently exchanging forecasts with the Office for Budget Responsibility ahead of the budget, with some experts noting that excessive speculation is contributing to market volatility.
