Bond markets could force Rachel into ‘second budget’, warns leading City investor
Bond markets could force Rachel to bring in a second budget if investors react negatively to leading financial strategies, a senior city investor warned of the chanterelle in the face before 26 November.
David Zahn, head of European income at the $1.69 Trillion Asset Manager at Franklin Templeton, said the biggest risk for Reeves is that the markets “disappoint” rather than celebrate the currency – a situation that could ride gilt yields strongly.
“If the bond market stays too bad, the government will have to react if bond yields start to rise too much,” Zahn said. “It would force his hand to make a second budget.” He added that 10-year or 30-year UK government bonds reaching 6% would be “unsustainable”, warning of “more death” if borrowing costs rise too much.
The yield on 30 gilts currently stands at 5.35%, down from a high of 27 around 5.75% in early September. Ten-year yields are selling at 4.53%.
Zahn said bond investors are likely to welcome the budget because the Labor government appears unable or unwilling to push through spending cuts. That reduces the size to bring down borrowing and limits the chance that hard yields will fall.
“If he is not going to face a big tax, I don’t see what he can do that the market will go ‘reverse, fix it’,” he said. “He doesn’t do money cuts.”
This warning follows reports that left the plan to raise the income tax – to move Zahn argued that “live markets would have taken it well” as a sign of greater financial stability. Instead, Reeves is expected to end the tax brackets, which will raise 10 estimates that will raise £10 billion a year as more workers are drawn into higher tax bands with higher income drag.
The chancellor can also propose a range of smaller rates to generate more revenue.
Markets will be watching closely to see if Reeves creates enough financial space to meet the Labor debt regime in five years. Earlier he had left only 10 billion in the head – a buffer that is now considered to be drained from the perspective of long-term production.
Zahn suggested that markets would like to see at least $20 billion in capital in the budget. He also predicted more tax increases around the next year: “I don’t think this is one. He probably won’t come back next year, but someone will.”
Analysts warned that any spike in borrowing costs after the budget could be driven by politics, not economics.
James Smith, Economist advanced markets, said that the Labor polls and the pressure on Keirir Starmer may be inclined to new predictions, which will probably change the new chancellor’s return – one that may change the rules of money and increase lending. “
Michael Browne, Global Investment Strategist At The Franklin Templeton Institute, says the shock of the Liz Truss Mini-Budget crisis is still shaping investor behavior.
“Markets don’t forget that,” he said. “Get it right, and the UK is exciting from a bond and equity perspective. But at the moment, what’s the evidence we’re going to run into another risk.”
