Markets HATE Labor Budget as Stocks Plunge and Borrowing Costs Rise | Personal Finance

Financial professionals are unimpressed, given the performance of the FTSE 100 index and, more worryingly, UK bond yields.

The FTSE index of Britain’s top listed blue chip companies fell more than 1% today after continuing yesterday’s sell-off.

Investors are not happy with Reeves, who is loading £25 billion in tax increases on British companies. Bosses will cut wages, cut jobs and reduce investment to survive. This will hurt the economy.

Britain will survive a period of stock market volatility. Stock prices go up and down all the time. They are influenced by many factors, and not just the budget.

For example, there is the small matter of the US presidential election next Tuesday. Investors will soon worry about that.

This is what I’m concerned about.

The bond market also hates the budget, and is growing more suspicious by the minute. It has enormous power to harm Britain, as short-lived Tory Prime Minister Liz Truss discovered.

Most people never think about the bond market. Yet it is bigger than all the world’s stock markets combined.

It consists of large institutional investors, who want to invest large sums of money in low-risk, income-paying assets, mainly government bonds.

British government bonds, known as gilts or gilts, should be among the lowest risk of all. Not anymore.

As we saw under Liz Truss, when bond investors think the British government has lost control of our finances, they demand extra interest on loans to us.

That means the national debt will suddenly cost billions of pounds more to service every year. Or maybe tens of billions.

It’s why mortgage rates shot past 6% after Truss’s mini-Budget fiasco in September 2022. Within days she was gone.

The bond market killed her. The trigger was interest rates on 10-year government bonds that shot up from 3.03% to 4.42% in just over a month.

This afternoon, government bond yields reached 4.5%. That is higher than under Truss. The so-called ‘league vigilantes’ are back in power and this time they’re targeting Rachel Reeves.

Yesterday the Chancellor announced £40 billion in tax increases, plus a further £32 billion in additional government spending. In total, it will borrow as much as £300 billion in the year to March.

All this borrowing will slow economic growth. For example, in 2027 the British economy will grow by just 1.5%.

At that rate, our budget deficit and national debt will continue to rise. No wonder the union is waving vigilantes with their pitchforks.

They don’t have it.

So far, Reeves has survived higher bond yields than Liz Truss interest rates are generally higher.

But Kathleen Brooks, analyst at XTB UK, said the danger is clear. “The Budget has caused a bond market reaction, and the bond vigilantes are at Britain’s door again.”

The “sense of panic” around this budget is akin to Liz Truss’ meltdown, Brooks said.

She then asked the question everyone is asking: “How high will UK interest rates get? What’s stopping them now that they’ve crossed the 4.5% level?”

What did Reeves do? We’ll find out in the coming days.