The British bond market collapses, pound plunges amid fears of a repeat of the “Truss moment”

UK Bond Market Faces Largest Selloff in Nearly Two Years

Reuters,Foreign exchange dealer July 2, London - The UK bond market has experienced its largest single-day selloff since the "Truss Crisis" of October 2022, with the 10-year gilt yield soaring 22 basis points to 4.681%, and the 30-year yield also rising nearly 22 basis points. This sharp drop was triggered by the UK government's significant reduction of welfare reform plans, which derailed fiscal savings objectives, while Chancellor Rachel Reeves' emotional breakdown in parliament raised serious concerns about her job stability and fiscal discipline.

Analysts at Saxo Bank noted that bond yields were already on an upward trajectory but accelerated when Reeves lost her composure during the prime minister's questions session, considered the "spark" for market panic. The pound fell over 1% against the dollar to $1.361, its largest drop in three weeks; the euro rose 0.6% against the pound to 86.4 pence, a two-month high.

Pound Volatility Sparks Concerns Over Fiscal Discipline and Political Stability

Analysts pointed out that the UK government's inconsistent stance on welfare cuts eliminated the planned £14 billion fiscal space savings, undermining trust in fiscal discipline and sparking investor fears of a "bond vigilante" return. AJ Bell analysts remarked that this turbulence mirrored the "Truss moment" bond market crash, prompting a reevaluation of the UK's debt sustainability and potential future tax hikes.

Within the Labour Party, some MPs criticized Reeves' welfare cut plans as "targeting the vulnerable," sparking policy and intra-party tensions. Although Prime Minister Starmer quickly expressed "full support" for Reeves, markets remain worried about breaches in fiscal discipline and political stability erosion.

Bank of England Hints at Further Rate Cuts

At the European Central Bank forum in Sintra, Portugal, Bank of England policymaker Alan Taylor stated the UK economy faces "soft landing" risks, with increased threats of economic weakness and trade disruptions by 2026. He recommended that the UK cut interest rates five times in 2025, once more than market expectations, as further easing might be an option to tackle the current economic predicament.

According to his charts, if the economy continues to deteriorate, the UK's benchmark interest rate may fall to 2.25% by next year's second half, below market expectations of 3.75% by year-end. Currently, the Bank of England holds rates at 4.25%, with markets anticipating at least two cuts before year-end.

Wage Growth Intensifies Central Bank's Inflation Dilemma

Meanwhile, recent data shows that the median salary in the UK private sector increased to 3.5%, with those receiving raises of over 6% jumping from 12% to 19%, indicating accelerated wage growth may intensify inflationary pressure. While the Bank of England expects wage growth to slow this year, inflation in September is anticipated to rise to 3.7%, above the target range, complicating monetary policy operations.

Markets Watch US Nonfarm and ISM Data Closely

Looking ahead, global markets will focus on the US June nonfarm employment data and the ISM non-manufacturing index to be released at 20:30 and 22:00 Beijing time on July 4, respectively, to gauge whether the Federal Reserve will accelerate its rate cut pace, impacting global bond markets and the pound significantly.

Chancellor Reeves' "meltdown" in parliament became the flashpoint for the bond market and pound turmoil, compounded by flip-flopping welfare reforms and debt expansion concerns, reminiscent of the "Truss moment." With potential further rate cuts by the central bank, challenges to economic soft landing, rising wages, and inflationary pressures intertwined, the UK faces multifaceted fiscal and monetary policy pressures, with global investors closely monitoring subsequent political and economic developments.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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