Gilt investors warn Rachel Reeves she may need to raise taxes

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Gilded investors have told Britain’s Labor government it may need to raise further if it is to maintain confidence in the bond market after its borrowing costs hit their highest since the financial crisis.

Chancellor Rachel Reeves has vowed not to repeat the £40 billion tax hikes in the Budget that many businesses say have dampened economic activity, but several bond market participants have warned the UK government could look to taxes to shore up its finances. after losing the ability to maneuver under its own fiscal rules.

Mahmood Pradhan, head of global macro at Amundi Investment Institute, said the UK government “should not be preoccupied with ruling out a tax hike” and that “pledges of cost containment alone may not be enough to convince markets”.

A punishing few months in global bond markets, driven in part by expectations of US President-elect Donald Trump’s inflationary policies, pushed UK 10-year bond yields to a 16-year high and erased the government’s ability to fight fiscal rules.

Reeves on Tuesday said in the parliament he was “absolutely committed” to sticking to his fiscal rules as he dismissed questions from MPs about whether he would be forced to cut government spending.

The new tax hikes will be politically toxic and further undermine Reeves’ political standing.

The yield on Britain’s 10-year bond rose to a 16-year high of 4.93 percent last week from 3.75 percent in mid-September, as a global bond selloff mixed with investor concerns that the U.K. economy is entering a period of stagflation. – where persistent price pressures prevent the Bank of England from cutting interest rates to support a faltering economy.

The yield on the 10-year bond rose to 4.82 percent in morning trading after inflation data opened the door to a faster rate cut by the BoE.Yields are moving against prices.

Ranjiv Mann, senior portfolio manager at Allianz Global Investors, said any further rise in yields would “increase pressure on the government to take steps to address the budget deficit in March instead of waiting for the budget in the fall.”

The government could take “corrective action”, Mann said, such as tightening the actual timing of spending in so-called vulnerable departments such as local governments or freezing personal income tax thresholds after 2028.

Robert Tipp, head of global bonds at asset manager PGIM, said he believed the UK government could be forced by market movements to “give away” its tax position rather than rely on spending restrictions. “It’s a classic example of where hope is a bad strategy will be,” he added.

Peder Beck-Fries, an economist at bond giant Pimco, said it was increasingly likely that the UK government would have to address its deteriorating fiscal position.

“We would be very surprised if the government did not adjust taxes or spending to meet these fiscal rules . . we expect the government to maintain fiscal confidence and manage these variables.”

Investors have warned that there is now a risk that unless the government offers further fiscal tightening, gold will sell off further as investors build more.fiscal risk premium“in debt.

Reeves stressed on Tuesday that global factors have boosted bond markets around the world and reiterated his pledge to keep to just one budget a year.

The Office of Government Budget Responsibility is due to provide updated economic and fiscal forecasts on March 26.

The recent gains in bond yields, if held, would be more than £9.9bn of the fiscal space left by Reeves in the October Budget. :

A cut in longer-term growth forecasts will hit the Chancellor’s budget head further, adding to his fiscal challenges.

Robert Dishner, senior portfolio manager at Neuberger Berman, said the government could consider policies such as increasing the cost of national insurance for employers, reducing its inflationary impact and even considering an external review of the effectiveness of government spending.

“Are there any unnecessary expenses?” The government can probably find some savings here or there.”

The spokesperson of the Treasury said. “This Government’s commitment to fiscal rules and sound public finances is non-negotiable. The Chancellor has already indicated that tough spending decisions will be taken, and the spending review to eliminate waste is ongoing.”

Additional reporting by George Parker