A massive amount of nonsense is currently being said and written about the 'market' reaction to Rachel Reeves crying in the Commons on Wednesday following the government's defeat on its welfare proposals on Tuesday.
This is the ten-year gilt chart from the FT for the last week. It shows the effective rate of interest that could be generated at any moment if the gilt in question had been bought at a particular moment at the price then prevailing. The rate varies n ot because the actual interest rate does, but because the interest rate payable on the gilt or bond is fixed, but the price paid for it can vary.
What the chart shows is a number of things.
The first is that the prices were fairly stable until 1 July. Then they rose, meaning the interest fell. That happened because Andrew Bailey, in his role as Governor of the Bank of England, suggested that he might cut the rate of utterly unnecessary quantitative tightening bond sales that the Bank might make. These sales only take place to force the rate up, so indicating they might slow down means that the rate fell. This is an issue I have discussed for a long time here, and it indicates how malevolent the impact of the Bank of England on interest rates and the cost of government borrowing is.
Then, on Tuesday night, the government lost in the Commons, and the rate rose a little on Wednesday morning as a result. It did not rise by much. Rachel Reeves' claim that there would be chaos in the markets if disabled people were not sacrificed in their hundreds of thousands to them proved to be totally untrue, as I predicted.
Things only changed when Reeves appeared in the Commons, weeping. She claims this was for a personal reason. Chancellors do not weep in pubic for personal reasons. They hide when that happens. Whatever the cause of her grief, she made a disastrous error of judgement by appearing because it had an impact on the confidence of markets. That is precisely why she should not have appeared in the state she was in.
The reaction was immediate. She sent out a signal that she was out of control. The markets noticed immediately, and the price of gilts fell as a minor sell-off began, with rates rising as a result.
Then Stamer said she was staying.
She delivered a PR appearance matched with lots of faux bonhomie with her colleagues whilst they delivered another nail in the coffin of the NHS, and things stabilised, albeit at a higher level than they were before the defeat.
These issues have to be appraised independently.
Firstly, the fall in rates resulting from Andrew Bailey's comments proves that I am right that the Bank is acting against the best interests of the country. The means to cut UK interest rates is readily available. Just stop quantitative tightening. It is that straightforward.
Second, the failure of the market to react in any significant way to the events of Tuesday night shows that I was also right: Reeves' claim that markets would react adversely was wrong. They hardly noticed.
But they did notice her crying uncontrollably. It was hard to miss. And they reacted. Risk increased, and so they priced it. Here was a government that was out of control. It need not have been, but a key person within it had obviously lost control, and the reaction was unsurprising, and all Reeves' fault.
Now, three things are being claimed.
The first is that Reeves has to stay, because Starmer saying he supported her calmed markets.
Second, only she, supposedly, has the confidence of markets.
Third, all this proves that the government is utterly dependent on and has to appease markets, and so she has to stay.
You almost wonder if she staged all of this, except that all that is being said is absurdly wrong.
First, the fall in rates on Tuesday proves the government can control rates. All it has to do is tell Bailey and the Bank to stop quantitative tightening. The job is then done, but no one is saying this. Why not, I wonder? Do they all really believe that the Bank is really that independent? If so, they are fools, because it is not. Literally, rates could fall heavily today if the government so wished. It clearly does not.
Second, the drop in rates, but not to where they were before Reeves started crying, is a measure of a slight fall in risk in the short term. It is not an indication that she has to stay.
Third, of course taxes need to rise: but if markets think that means rates must rise then all that means is that the action with quantitative tightening becomes more important still, and both could be done to the overall advantage of the country, most especially if the taxes were very largely on the wealthy - which is what the City really does not like, becasue it is very small-minded and self-interested, which is exactly why Reeves so inappropriately sought to sacrifice disabled people to it in the first place, which they liked, providing some indication of just what sort of mindset is to be found there.
So, are we suddenly in hock to markets? No, of course not.
Is Reeves invulnerable now? No, of course not.
Is Starmer's authority restored? No, of course not.
Shall we move on? Rates are still for the government to set, and it could. Reeves is hopeless at her job, and Starmer should go with her. This is the reality. And sometime this might work out.
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“She sent out a signal that she was out of control.” Performative stuff or, her controllers lost control.
I notice that at no point is this simple reality discussed by the MSM: the gov could spend without raising taxes – depends on what it spends it on – but both health and education have multipliers – albeit with a timing delay ref tax collection. Won’t happen – because imbeciles such as Reeves and Bailey have been chosen by their controllers as safe pairs of hands. I propose to nominate Reeves for the Uk equiv of an Oscar (impressive make up by the way).
I see striking parallels with (apologies) elec market reform. In the case of the city – if gov simply spent (oy BoE – cough up) well no gilts to play with (or rather less) & if the gov told the BoE – oy – this interest rate – were would the profit be? cos profit comes from trading and if you don’t control the game (issuance of gov debt and a lever on interest rates) how can you win? Same with EMR, traders want the system to stay the same & – interestingly these traders are part of the banks which don’t want the gov to tell the BoE to cough up & don’t want the gov to tell the BoE to set interest rates at X. Banks.
Banks, many/most foreign calling the financial shots in the UK (that does have a familiar ring – foreign policy – foreign govs?) . Have to visit a food bank after reading this? well spare a thought for the bankers – they have a life style to support as well & big limmos and mistresses/boys don’t come cheap – so they need to control the game. Move along – nowt to see here.
Thank you and well said, Mike.
A colleague who works with our EU bank employer’s traders says electricity is the most profitable sector.
I find it incredible that two of the top politicians running the country have not looked at the 1997 Act to see how the BoE actually works. But this shows to me that they are being ‘handled’ by others – there can be be no other explanation.
@ PSR
When asked, in writing, if my MP could confirm that the Chancellor had read the Exchequer and Audit Departments Act 1866 and the UCL research on “The Self-funding State”, her written reply was that the MP was certain that Reeves “had been fully briefed by The Treasury”.
I noted that the MP failed to actually ask Reeves… denial of responsibility, I guess.
Thanks Anne.
The Treasury cannot be trusted – I would sack the lot of them.
I think we may take the proposition that the Financial Markets want Reeves to stay as Downing Street inspired, and Press spin; as you shrewdly observe, the Financial Markets acted adversely specifically and precisely to Reeves unfortunate appearance in the Commons, and not to anything else.
The idea that politicians can survive adverse appearances (when the mask of authority slips, for whatever reason). Margaret Thatcher’s tearful exit from Downing Street was fortunate, because it happened after, not before the fall from grace. Kinnock never quite recovered an innocuous fall on the beach. Biden stuttered and stumbled to defeat; nobody had to say anything (and few had said anything).
There is a big issue here. We consider such failures trifling; but humans rely far more on body language, on eyes, on gesture for the authenticity they seek – because they know they cannot trust language alone. This is profound, not trivial. It is much harder to U-turn body language convincingly, than it is to U-turn on what was said. Which is why appearance is important, and there is such a big attempt to trivialise it by politicians (who nevertheless train hard for appearances).
Appearance, however can be disguised, and with sufficient professional media support, and the framework of television or event programming, production, editing, lighting and all the tricks of the trade; some very dubious people have managed to build big careers, without betraying their real character (Jimmy Savile, et al….)
An interesting insight into who Starmer’s team think needs to be placated, in this story from today’s Guardian – not so much markets, as the king over the water.
https://www.theguardian.com/politics/2025/jul/04/keir-starmer-says-good-relationship-with-donald-trump-based-on-shared-family-values
Hands up anyone who, when shown a picture of Donald Trump, immediately thinks of “shared family values”?
Nepotism maybe, and a rather discomfiting way of talking about his daughter, but not “family values” as it is generally understood.
Maybe we are about to re-run a “back to basics” campaign?
I didn’t know whether to laugh or cry when I read that.
Maybe the markets just want to know “we’re with Donald”?
Maybe the UK’s first politicsl family will get invited to dinner at Mar-a-Lago with the Trump family?
Much to agree with
This entrail reading and the emotions of one government minster and the effect on “the market” surely shows that the pretence of cold rational markets as the driving of a capitalist utopia is a fairly tail for the guilible or fanatics.
Markets are simply like a heard of sheep, following irrational trends and capitalist fantasy.
I despair to be honest. Most people I meet don’t want to talk about the nation’s finances/economy. Of those that will ‘talk’ most simply shrug their shoulders and say that there is no money, another refinement of the dwindling group will comment on the nation’s debt clearly frightened by the Jeremy Vines of this world.
On a wider level this is just another example of people fighting people. Wherever there is conflict, physical and economic, it is ordinary people suffering. I don’t care where you come from or what sorts of hats you wear we are pretty much just people. Behind all the strife there is always a tiny number of people stoking things up for their own reasons.
If we could just treat each other better, and that includes economically as well as physically, we all might get a better nights sleep.
I know I’ve asked you some questions about yields on bonds (effectively the current interest rate of bonds traded on the secondary market) but could you clarify a couple of things:
In the snip from the FT you provide the yield is shown as 4.55%. This will equate to a price that the bond is worth (this is not provided in the snip). Where does this yield come from? Is it the average interest rate of all 10yr bonds either sold or bought on that day in the secondary market?
If this yield had increased from say 4.2% to 4.5% the claim made in the press is that government borrowing costs have increased. But these bonds have already been sold by the government and the interest rate on those bonds (I.e. the coupon rate) was previously set by the government. So actually on these bonds government borrowing costs have not increased at all. Is this correct?
Does what the press mean (but which is never clarified) is that if the yield on bonds in the secondary market is at 4.5% then any new 10yr bonds sold by the government on the secondary market will need to have a coupon rate of 4.5%. So the current yield of bonds in the secondary market is dictating the coupon rate of future bonds sold by the govt on the primary market?
Many thanks
If the issue price was £100 and the coupon nominal rate is 5% and the price is now £109.90 the yield is 4.55%.
If the yield was 4.2% the price was £119.05. I am assuming very long dated bonds for ease.
None of these changes the cost of historic debt. They change the price of new debt, which will match current market rate, near enough.
Ok. Thanks for your response. So to clarify, movement in the yield on bonds on the secondary market does not affect govt borrowing costs of those bonds? it only influences the coupon rate that the govt will need to offer on the new bonds it issues on the primary market? Thanks
Not in those bonds.
But the government issues up to £300bn of bonds a year