Bond managers have the UK in their sights

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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newspaper.

Pessimism about the British economy has become contagious. From businesses it has now spread to financial markets. Last week investors ditched gilts and sold the pound, as concerns about the UK’s financial performance grew. The price of the ten-year government bond is close to more than 16 years. If they do not go back down, the “ironclad” fiscal policy of the chancellor Rachel Reeves – to balance the current budget within five years – you will break. To regain credibility, the Labor government must urgently outline credible plans to boost economic growth and control spending.

The recent sell-off in gilts is due to the American development. High inflation expectations in the world’s largest economies – linked to President-elect Donald Trump’s tariff plan and strong economic data – have pushed up Treasury yields, which are the world’s largest borrowers. yes. This has increased concerns about the sustainability of debt in some economies. But negative talk about Britain’s “stagflationary” growth outlook, following the tax hikes in the Autumn Budget last October and the limited headway Reeves has left against his own fiscal policies, has led the UK to be the main goal of vigilantes.

What can the government do? Unless yields start to spiral out of control, inconsistent announcements to cut costs or raise revenue now could cause panic, and possibly even push yields down significantly. Bond yields are declining, and current sales have been unprecedented. Comparisons with the market fears generated by former Prime Minister Liz Truss’s “mini” Budget in September 2022 are widespread.

But doing nothing is not an option either. Trump’s ability means global bond markets will remain tight. And the message from investors is that their faith in Britain’s ability to cut costs and boost growth in this volatile environment is at an all-time low. After that, the work must be completed economic policyinstead of talking vaguely about future-performing savings and being big supporters. Businesses and investors want to know how Britain’s prospects will improve in the near future.

That means the government must double the effort removing barriers to recruitment, investment and business expansion. Plans announced on Monday creating AI “growth zones” is a start. But businesses also want to know whether improvements to the planning system will speed up the construction process across the country.

An industrial plan – planned for the year – is also available opportunity to galvanize confidence in developing a plan for important infrastructure projects, and strong plans to improve access to the best talent. Reeves is likely to outline the tax relief and simplification measures ahead of the Autumn Budget, which will be the main financial event this year. That can help stimulate business interest.

However, bond sellers will be looking for evidence of a near-term improvement in Britain’s financial position. The Chancellor is right to rule out further tax rises, which would be dangerous for confidence. But that means Labor must be prepared to save money on high, but politically sensitive costs, such as welfare benefits, public services and the triple cap on pension payments. Of course, if the financial figures do not improve significantly, the government can reduce the feeding of the Office of Financial Accountability in the next vision of March 26.

Rising bond yields are a wake-up call. Workers should remain calm, and avoid hasty announcements, but they cannot continue in the slow and mysterious way in which it began. It is time for the government to explain – with passion and detail – its strategy to deliver growth and cut costs.