Bond Watch: why Reeves exit rumours spook gilts

Sam Benstead breaks down the latest news affecting bond investors.

4th July 2025 12:21

by Sam Benstead from interactive investor

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Gilt yields jumped this week due to worries that Rachel Reeves may resign as Chancellor of the Exchequer.

The 30-year gilt yield rose from 5.2% to 5.4% on Wednesday, before falling back to around 5.3%. 10-year gilt yields jumped from 4.4% to 4.6%.

The sell-off was caused by the government removing £5 billion of cuts to disability benefits, which puts their commitment to tight fiscal rules in doubt. It shows that the party is struggling to control its MPs and force them to back spending cuts. The party won its majority largely based on its commitment to being fiscally responsible, with Reeves seen as a safe pair of hands at the Treasury.

Reeves was also tearful during Prime Minister’s Questions on Wednesday, and Sir Keir Starmer refused to say whether she would stay in her post. However, on Thursday he reiterated support for the Chancellor and the party’s commitment to the fiscal rules.

Gilts sold off because they believe Reeves is a responsible figure in the Labour party, pushing back against calls from MPs for more spending and higher taxes.

If Reeves is removed or steps down, her replacement could be less fiscally responsible. More spending would mean more borrowing, which gilt investors would view as negative, and therefore would lead to higher gilt yields. The market reaction was actually a vote of confidence in Reeves, so long as she holds onto her job.

Jim Reid, a strategist at Deutsche Bank, explains: “For markets, the logic is that Reeves has been a big defender of the fiscal rules, and there’ve been growing calls for these rules to be eased and for borrowing to go up. So the concern in bond markets is that a new Chancellor might trigger a fresh wave of borrowing that pushes rates up further.”

Looking ahead, Reid notes that the government is going to struggle to meet their fiscal rules following spending U-turns and the impact of US tariffs on the UK economy.

Reid adds: “On tax, they’ve ruled out raising several large taxes like income tax and VAT, and the tax rises already announced generated unpopularity. On spending, they’ve come under intense pressure in response to the spending reductions so far, which have resulted in U-turns. And if they eased the fiscal rules, the fear would be a fresh market sell-off like yesterday (2 July). So it’s not obvious which way they turn.”

Nevertheless, The Financial Times reported that fund giants BlackRock and Schroders both bought gilts following the sell-off, suggesting that markets overreacted and the UK government will govern in a fiscally responsible way.

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