The bond markets could compel Chancellor Rachel Reeves to deliver a second budget if investors are disappointed by her fiscal plans next week, according to a City investor. David Zahn, head of European fixed income at Franklin Templeton, said that if Reeves “disappoints” on 26 November, it could trigger a sharp rise in bond yields, forcing the government to react.
Zahn warned that a yield of 6% on either 10-year or 30-year UK government bonds would be “unsustainable” and could create a “death spiral”. Currently, 30-year yields stand at 5.35%, having hit a 27-year high of nearly 5.75% in early September; 10-year yields are around 4.53%. Zahn argued that without spending cuts, the market is unlikely to welcome the budget.
He noted that ditching a planned increase in income tax had already led to a sell-off in government bonds. Instead, Reeves is expected to freeze tax thresholds, which ING estimates could raise £10bn annually as fiscal drag pushes workers into higher brackets. She may also raise other smaller taxes. Zahn suggested markets want to see at least £20bn of fiscal headroom, but predicted any tax rises would be repeated next year.
James Smith, ING’s developed markets economist, said any post-budget spike in bond yields could be driven by political factors, such as a potential leadership challenge to Prime Minister Keir Starmer. Michael Browne of Franklin Templeton Institute noted that the 2022 Truss mini-budget crisis still lingers, warning that markets remember the episode and are watching closely.
