Labour infighting puts chancellor's budget plan to reassure bond markets at risk

"There is one narrow, perilous route by which Rachel Reeves can successfully deliver her 26 November budget, and it runs right through government bond markets. But the current outbreak of Labour infighting driven by a flurry of pugilistic briefings from inside No 10 risks cutting that route off with two weeks still to go before budget day. Before news broke of an abortive leadership challenge, the chancellor had been carefully laying the groundwork for a tough statement, likely to include busting Labour's manifesto pledges"

"One rationale for that drastic, manifesto-breaking step is the Treasury's belief that if Reeves acts decisively to build up more headroom against her fiscal rules, investors will be reassured about her determination to fix the public finances. The chancellor's hope is that will help to eliminate what has become known as the moron risk premium for the UK government's bonds, known as gilts making it cheaper for the Treasury to borrow."

"The term was coined by Dario Perkins, of research firm TS Lombard, in the brief but chaotic Liz Truss period three years ago. Back then, investors were effectively demanding a small additional premium to hold UK government debt, to allow for political instability. That moron premium has never completely disappeared, despite Starmer and Reeves pitching themselves as the guarantors of fiscal stability."

A successful 26 November budget hinges on stabilising UK government bond markets. Labour infighting and hostile No 10 briefings risk undermining market confidence with two weeks to go. The chancellor had been preparing a tough budget, potentially breaking manifesto pledges by raising income tax, to create additional fiscal headroom under Treasury rules. The Treasury expects decisive action to reassure investors and reduce the residual "moron" risk premium on gilts that emerged after the Truss mini-budget. Market reaction to talk of tax hikes reduced 10-year gilt yields from above 4.7% to under 4.4% before renewed political uncertainty.

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