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Rachel Reeves is trapped between Liz Truss, Donald Trump and Labor Parliamentarians. This week, the bond market illustrated what awkward place it is.
From the general elections that led the work to power a year ago, Reeves has had the task of delivering the impossible. Somehow, to balance books, you have to reduce spending (unpopular with many parliamentarians in your party and the vulnerable components they represent), increase personal taxes (a violation of a commitment to manifest) or increase loans (which tests the patience of bond holders). Rather she than me.
The animated scenes in the United Kingdom markets in recent days illustrate how tight is a corner in which it has been painted. The well -being reform bill that has been defending for months, and that involves large dutters benefits, faced a great rebellion of parliamentarians from its own group and had to be very diluted.
On Wednesday in Parliament, everything reached a critical point. Prime Minister Keir Starmer stopped immediately in his support immediately, and she sat behind him looking tired and visibly annoying, Catnip for the staunch baits of reeves in the financial markets that often refer to her, with more than one misogyny, I must say, as “Rachel de Accounts”. (Yes, that nickname is worse than “Phil spreadsheet” for Philip Hammond, and if you are not sure, I suggest that I ask some women).
The precise cause of your anguish is not clear and, frankly, none of our affairs. But the financial markets in fact, frightened by the notion that it may not have much more time in office, or that bondholders can end like the Patsies here, they did not stay to find out.
Sterling, who has been flying higher this year thanks to the slide in the dollar, received a blow, 0.8 percent in the day. Even more worrying, the bonds of the government of the United Kingdom gagged. The prices were in line with the currency, a worrying pattern generally reserved for emerging markets, generating an increase in long -term debt yields that approaches the same league as the 2022 crisis.
To be clear, this week’s bamboleo was not even close in severity of that famous armor moment. It was not a complete crisis, the increase in performance was shorter and less pronounced, and did not trigger any secondary explosion, as Truss unfortunate expenses plans did with the pension industry at that time. There was no need to activate the response team to the Crisis of the Bank of England, and some large investment houses happily bought the fall.
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But the entire episode shows how dark a shadow is still thrown, almost three years after its six -week period when the prime minister ended. The headlines of the United Kingdom government bonds are still quite traumatized by that crisis and, as we saw this week, they quickly rush in case of a restoration. This is simply a bond market too small and voluntary, and Sterling is too far from the list of reserve currencies, to absorb unpleasant clashes.
Trump enters this photo already uncomfortable due to his own loan and expenses plans. For a few months, long -term loan costs everywhere, from Japan to the United Kingdom and the USA.
We saw in January that the increase in the yields of the US government bonds. Uu. It carries the rest of the market with them. If the president of the United States continues with the part of the long -term part of the market, since it has been late, then the costs of loans will continue to increase throughout the world, even in the United Kingdom, leaving Reeves with even less space for maneuver.
“A fiscal crisis now seems to be on the horizon unless difficult decisions (such as tax increases) are promulgated,” said Neil Mehta, RBC Bluebay Asset Management portfolio manager. “The markets will be on a maximum alert in the coming months.”
What can break this curse and avoid this ugly result for Reeves? Investors say that the answer is vision and credibility. Honestly, they don’t care about who is chancellor whenever the plan makes sense, and they have no patience for the formulation of chambol policies. “It was a rebellion against the lack of discipline on the way forward,” said Sonja Laud, investment director of the legal & general asset management division. “Why do you invest? Because you think [there is] a plausible growth strategy. ”
Germany, for example, can attract investors to their long -term debt because it is selling a good reason to finally eliminate the brakes of its strict fiscal policy. The United Kingdom does not have the same starting point or the same luxury, so for investors, it needs a much stronger narrative. “Psychology here is trust,” said Laud. “It is not politics, it is the fact that you are undermining.”
For markets, exchange Reeves for an alternative chancellor would probably make little positive difference, assuming that the formulation of policies again last. It could get worse, if a rookie in poor condition or angry the lords of the bond market. Vibrations and messages should not matter to markets as much as cold and hard economic data, but they do. Time is short for Reeves and Starmer to somehow recover confidence, both in commercial floors and in backbenchs.
katie.martin@ft.com
