The bond market has delivered its verdict on Britain’s latest bout of political turmoil. Long-dated gilt yields surged this morning, breaching the 4.5% threshold for the first time in months, as sterling slumped to a fresh 12-month low against the dollar. This is not a protest vote. It is a capital strike.
Investors are pricing in the risk that the government, paralysed by a leadership crisis, will abandon fiscal discipline. The yield on the 10-year gilt jumped 18 basis points in early trading, before settling at 4.52%. The pound dropped 1.3% to $1.2080, its weakest since October 2022. The sell-off was triggered by reports of a cabinet rift over spending plans, with one minister quoted as saying “the chequebook is open.”
For those of us who lived through the Truss/Kwarteng episode, the parallels are uncomfortable. Then, it was unfunded tax cuts. Now, it is simply an inability to govern. The market does not care about the niceties of parliamentary procedure. It cares about the bottom line. And the bottom line is this: a government that cannot hold itself together cannot hold the line on inflation.
The Bank of England will be watching with barely concealed alarm. Higher gilt yields feed through to mortgage rates, exacerbating the cost-of-living crisis. A weaker pound imports inflation, making it harder for the MPC to ease policy. The market is effectively doing the Bank’s job for it: forcing tighter financial conditions without a single vote.
Capital flight is a subtle beast. It does not announce itself with a press release. It shows up in the data: falling sterling, rising yields, and a widening spread over German bunds. That spread now stands at 185 basis points, the widest since the 2022 crisis. Investors are asking for a premium to hold UK debt. They are asking for a premium to trust the UK government.
The irony is that the UK economy is not in bad shape by some measures. GDP growth, while sluggish, is positive. Unemployment is low. But markets do not trade on backward-looking data. They trade on expectations. And the expectation today is that Whitehall will spend its way into a debt spiral, with no coherent plan to pay for it.
The Chancellor must act fast. A clear statement of fiscal rules, a commitment to independent oversight, and a credible path to deficit reduction would go some way to calming the markets. But words alone will not suffice. The market wants to see a budget that adds up. Until then, the gilt sell-off will continue, and sterling will remain under pressure.
This is not a time for complacency. The cost of borrowing for the government is rising. That means less money for public services, or higher taxes. Either way, the burden falls on households and businesses. The leadership crisis is not just a Westminster soap opera. It is a direct threat to the nation’s finances.
In the City, we have a saying: “markets hate uncertainty.” And right now, there is no greater source of uncertainty than a government that cannot govern. The numbers don’t lie. The yields don’t lie. The question is whether anyone in Whitehall is listening.
