Rachel Reeves may keep pushing forward, but her fate is sealed

The Chancellor’s decision to travel to China while bond markets turn against Britain highlights a much larger issue, and it’s not a positive signal.

Rachel Reeves flew to China on Thursday night to forge stronger ties with the nation and help stimulate the British economy amid instability in the UK bond markets.

Critics pounced on the Chancellor for being “missing in action” as she departed for Beijing to hold meetings with Chinese officials and business leaders. She left her deputy to answer questions in Parliament about soaring borrowing costs and the push for spending cuts to restore Britain’s credibility.

Of the £40bn in tax increases Reeves imposed last autumn, rising additional borrowing costs have already eroded one pound in every four, as international investors grow increasingly concerned about the scale of government debt.

The damaging fallout from her poorly received Budget has made Reeves a growing liability, and it won’t be long before the focus shifts to whom Prime Minister Sir Keir Starmer might appoint to restore market confidence. It has been an exceptionally bad week for Reeves.

Bond markets have decisively turned against the UK, pushing the yield on 10-year gilts to their highest level since the 2008 financial crash and the yield on 30-year gilts to levels not seen since the 1990s. Investors have scrutinized her figures and concluded, quite rightly, that they just don’t add up.

Reeves couls be compelled to implement emergency spending cuts.

There is a “high chance” that Rachel Reeves will be forced to announce emergency spending cuts this spring, as borrowing costs surged once again on Friday.

Rising gilt yields have effectively wiped out the Chancellor’s fiscal headroom, and Barclays has warned that Reeves may soon need to implement either spending cuts or tax hikes to convince investors that borrowing is being kept under control. According to the bank’s UK chief economist, Jack Meaning, if borrowing costs do not decline before the Office for Budget Responsibility (OBR) updates its public finance forecasts on March 26, fiscal adjustments will almost certainly be necessary. While Meaning noted that spending cuts are more likely than tax increases, he also admitted that the outcome remains highly uncertain.

An enforced fiscal intervention would deal a massive blow to Reeves’s credibility, especially considering her manifesto pledge to deliver only one Budget per year. This cautionary message arrives amid recent market turmoil. Yields on 30-year government bonds have surged to their highest levels since 1998, significantly increasing the Treasury’s debt servicing costs and undermining the slim margin Reeves was relying on to hit her Budget borrowing targets.

At the end of October, the OBR’s forecasts showed that Reeves had fiscal headroom of just £9.9 billion; however, subsequent market movements have eroded this by an additional £10.2 billion, putting her on course to breach her fiscal rules.

Adding to the pressure, borrowing costs escalated further on Friday after December’s US jobs data revealed an addition of 256,000 jobs—well above the 165,000 expected. The unexpectedly robust US labor market has raised concerns that inflation might remain elevated for longer, reducing the scope for interest rate cuts by central banks. As a result, traders now anticipate just one rate cut from the Bank of England this year.

Moreover, despite the traditional tendency for higher rates to support a currency, the pound fell by a further 0.82% against the dollar, dropping to $1.22—the lowest level in over a year—and emerged as the worst-performing currency this year. Analysts like Deutsche Bank strategist Shreyas Gopal have even advised selling the pound, predicting that its decline has “further to go.” The simultaneous fall in the pound and rise in bond yields suggests that investors are increasingly skeptical about Reeves’s ability to manage borrowing and inflation effectively.

Goldman Sachs has warned that mortgage costs are likely to rise as the higher bond yields drive up borrowing costs throughout the market. In a note to investors, James Moberly stated that continued sell-offs in gilt yields could force the government to take corrective fiscal measures in March rather than waiting for the Autumn Budget.