The reversal of the UK government's welfare policy has led to a significant sell-off in gilts, resulting in the highest borrowing costs since the global financial crisis. Comparisons to the Liz Truss era arise as doubts about fiscal stability grow. The abandonment of a £5 billion welfare reform package has left a £6 billion shortfall in public finances. Investors question whether the government can make necessary fiscal decisions, as ten-year gilt yields surged to 4.6%, highlighting a decline in confidence in the government's fiscal strategy.
The echoes of Truss in 2022 are unmistakable. Back then, it was a reckless mini-budget that shattered market confidence. This time, it's a government lurching from one policy retreat to another, raising serious doubts about fiscal control and political authority.
Bond markets move on trust, consistency, and credibility. The sudden abandonment of major spending plans—without a clear alternative—signals weakness. Investors are now re-pricing UK risk accordingly.
The rise in gilt yields isn't simply about global rate expectations or inflation concerns. It's a direct reflection of waning confidence in the government's ability to stick to a coherent fiscal strategy.
Ten-year gilt yields have surged to around 4.6%, marking their highest level since 2008. The spread between UK government bonds and German Bunds has blown out to over 200 basis points, a clear signal that international investors are demanding a premium to hold UK debt.
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