Turmoil in markets blamed on Rachel Reeves placing out combined messages over tax rises
Bond markets swung wildly in the weeks leading up to the Budget amid speculation over the state of the public finances and the Chancellor’s plans.
The yield on ten-year gilts – a key measure of how much it costs the Government to borrow – fell as much as 1.2 per cent to a low of 4.379 per cent on November 4 after Rachel Reeves‘ pre-Budget ‘scene setter’ speech in Downing Street.
The Chancellor referred to downgrades to productivity in comments widely seen as a sign the income tax would be raised.
This was welcomed by investors who wanted certainty that she was prepared to take tough action to shore up the nation’s finances.
But yields, or borrowing costs, rose over subsequent days to as high as 4.505 per cent on November 10 before the Chancellor appeared on BBC Radio 5 and once again gave a strong indication that taxes would rise.
It was at this point that investors became convinced that the Chancellor was planning a 2p increase in income tax rates.
Borrowing costs dropped like a stone, with the ten-year gilt yield falling as low as 4.375 per cent on November 11, down nearly 3 per cent from the previous day’s peak.
Chris Beauchamp, chief analyst at trading firm IG, said ‘her decision to reiterate the warning about higher taxes on November 10 caused the yield to drop’.’
Bond markets swung wildly in the weeks leading up to the Budget amid speculation over the state of the public finances and the Chancellor’s plans. Pictured: Rachel Reeves poses with the red budget box last week
The second mention of it seemed to resonate even more than her breakfast appearance,’ he added.
On November 14, the Financial Times revealed Ms Reeves had ditched her plan to raise income tax rates – sending gilt yields soaring as high as 4.582 per cent.
Mr Beauchamp described the rise as ‘even more dramatic’ than the earlier falls and ‘suggested a lack of grip in No 10 and No 11’.
Although gilt yields fell on the day of the Budget, thanks in part to the extra headroom the Chancellor built in to the forecasts, they remain above their November 11 lows.
The ten-year gilt yield spiked higher yesterday, rising back above 4.5 per cent, as the fallout from the Budget continued. David Morrison, senior analyst at Trade Nation, said: ‘The real damage was done on November 13 and 14. More off-the-record briefings suggested that those tax hike plans had been abandoned.
‘Gilts slumped as yields and borrowing costs soared.
‘Yields are still significantly higher than they were before it was leaked that the 2p income tax rise was off the table. All-in-all, this has been an unedifying experience.’
