{"id":142435,"date":"2025-11-19T22:30:27","date_gmt":"2025-11-19T22:30:27","guid":{"rendered":"https:\/\/www.newsbeep.com\/il\/142435\/"},"modified":"2025-11-19T22:30:27","modified_gmt":"2025-11-19T22:30:27","slug":"bond-markets-could-force-rachel-reeves-to-do-a-secondary-budget-city-investor-warns-budget-2025","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/il\/142435\/","title":{"rendered":"Bond markets could force Rachel Reeves \u2018to do a secondary budget\u2019, City investor warns | Budget 2025"},"content":{"rendered":"

The bond markets could force Rachel Reeves<\/a> to deliver a second budget if investors are disappointed by the chancellor\u2019s fiscal plans next week, a City investor has warned.<\/p>\n

David Zahn, the head of European fixed income at Franklin Templeton, said the biggest risk from the budget on 26 November was that Reeves \u201cdisappoints\u201d, leading to a sharp rise in bond yields \u2013 the interest rate on UK government debt.<\/p>\n

In that scenario \u201cit forces her hand to do a secondary budget\u201d, Zahn told reporters in London. \u201cIt depends how the bond market reacts. If the bond market reacts very badly \u2026 the government will have to react if bond yields start to go up too much,\u201d he said.<\/p>\n

Zahn suggested that it would be \u201cunsustainable\u201d if the yield, or interest rate, on either 10-year or 30-year UK bonds reached 6%. Such high interest rates created a \u201cdeath spiral\u201d, he warned, meaning the government would hopefully act before yields rose that high.<\/p>\n

UK 30-year bond yields are now 5.35%. Back in early September they hit a 27-year high of almost 5.75%<\/a>. Ten-year bond yields are trading at about 4.53%.<\/p>\n

Franklin Templeton, a California-based asset manager, has $1.69tn (\u00a31.29tn) of assets under management.<\/p>\n

Zahn fears that the Labour government\u2019s inability to push through spending cuts means bond investors are unlikely to give the budget a warm welcome, so probably will not push down borrowing costs by buying more gilts (bond yields fall when prices rise).<\/p>\n

\u201cIf [Reeves is] not going to tackle any of the big taxes, I don\u2019t see what she can do that the market will go \u2018fantastic, you fixed it\u2019, because she\u2019s not doing any spending cuts,\u201d said Zahn, who argued that a package of spending cuts and \u201creal tax increases\u201d would bring down gilt yields and help the government\u2019s funding needs.<\/p>\n

Last Friday, there was a sell-off in government bonds<\/a> after it emerged that Reeves had ditched plans<\/a> for a manifesto-busting increase in income tax at next week\u2019s autumn budget.<\/p>\n

\u201cIf she had done income tax, I think markets would have taken that very well. It would have said, \u2018OK, we have somebody who\u2019s serious about getting the budget balanced,\u2019\u201d Zahn said.<\/p>\n

Instead of raising income tax, Reeves is expected to freeze tax thresholds<\/a> at the budget, which the Dutch bank ING estimates would bring in \u00a310bn a year as more workers fall into higher tax brackets as their wages rise. She could also raise a plethora of smaller taxes<\/a>, reports suggest.<\/p>\n

City investors are hopeful that the chancellor will create more fiscal headroom for herself in the budget, to help the government keep within its fiscal rule to have debt falling in five years\u2019 time.<\/p>\n

Reeves had previously left herself just \u00a310bn of headroom, which is thought to have been eaten up by an expected downgrade to the UK\u2019s predicted trend productivity growth rate. Such limited headroom left the Treasury particularly vulnerable to moves in the bond market or economic changes.<\/p>\n

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Zahn suggested that the markets would like to see Reeves give herself headroom \u201cnorth of \u00a320bn\u201d at this month\u2019s budget. But he also fears that any tax rises are likely to be repeated in a year\u2019s time, predicting: \u201cI do think this is going to be repeated next year, I don\u2019t think this is a one-off.\u201d<\/p>\n

\u201cShe probably won\u2019t be back next year, but somebody will be back in that seat. They\u2019ll be back next year,\u201d Zahn said.<\/p>\n

James Smith, ING\u2019s developed markets economist, said that any spike in bond yields after the budget was likely to be driven by political factors.<\/p>\n

\u201cThe ruling Labour party\u2019s poll ratings have fallen through 2025, and prime minister Keir Starmer is coming under mounting pressure within his party, not helped by recent communications missteps,\u201d Smith told clients. \u201cWere a leadership challenge to become a more imminent possibility \u2013 which at the moment, it\u2019s not \u2013 then markets may quickly assume that a new PM would mean a new chancellor. And a new chancellor, perhaps more left-leaning \u2026 would be seen as more likely to change the fiscal rules and increase borrowing.\u201d<\/p>\n

The Liz Truss mini-budget crisis of 2022 had not helped, said Michael Browne, a global investment strategist at the Franklin Templeton Institute, who warned that it reverberated to this day on both sides of the political divide.<\/p>\n

\u201cThe markets are not forgetting that either. It can see the opportunity set in the UK. Get it right, and this is really interesting. This is exciting, both from a bond and an equity point of view. But at this point in time, what\u2019s the evidence that suggests we\u2019ll do anything more than muddle through? And muddling through comes with risks,\u201d he said.<\/p>\n","protected":false},"excerpt":{"rendered":"The bond markets could force Rachel Reeves to deliver a second budget if investors are disappointed by the…\n","protected":false},"author":2,"featured_media":142436,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[114,184,85,46],"class_list":["post-142435","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-il","tag-israel"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/142435","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=142435"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/142435\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/142436"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=142435"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=142435"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=142435"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}