Financial markets are doubtful about the UK's economic prospects under Labour's stewardship, leading to rising borrowing costs and a weakening pound. What does this mean for UK investors?
Are the wheels coming off Rachel Reeve s's 'wagon'? Political allegiance may determine your answer to this question, but financial markets are adamant in their opinion. They believe the wheels are about to spin off their axles with potentially damaging financial consequences for UK households and businesses.
Investors in UK government bonds – both here and from overseas – just don't believe that the land of milk, honey, growth, and prosperity promised by the Chancellor of the Exchequer when Labour stormed into power last summer is deliverable. All they see is a government that has ramped up state spending through a toxic mix of higher borrowing and vicious taxes on UK businesses. In the process, it has created a poisonous financial recipe that could trigger economic stagnation, possibly recession. Financial markets are jittery, and the pound is plunging. So, last week, while the Chancellor jetted off to China with a begging bowl and a planeload of City grandees (why, oh why?), UK borrowing costs continued their frightening march upwards. The yield on ten-year UK gilts (government bonds) – a key measure of government borrowing costs that feeds through to mortgage rates and other loans – rose to 4.8 per cent, its highest level since the 2008 financial crisis. To put this figure into perspective, it compares to the 4.1 per cent yield on ten-year UK gilts in July last year when Labour triumphed at the polls – and the 4.5 per cent yield in the wake of Kwasi Kwarteng's tax-cutting Budget in September 2022 that triggered his 'resignation' and the end of Liz Truss's brief reign as prime minister. Higher yields make UK gilts more attractive as a potential new component of an investment portfolio – as experts explain later – they are not good news for a government dependent upon borrowing for its grand economic revival plan to work. Rising gilt yields mean higher borrowing costs for the Government – and given the strict fiscal rules Ms Reeves imposed on the public finances in last October's Budget, she is becoming increasingly boxed in. If these debt costs keep rising, she will have no choice but to either curb government spending (fat chance) or, God forbid, fleece taxpayers and businesses with even more tax rises. If the latter option is chosen – so far, the Government has indicated further tax rises are not on Ms Reeves' to do list – it will trigger a spiral towards economic calamity. Ben Kumar, head of equity strategy at investment house 7IM, says: 'Sentiment about the UK has been hurt by the fear that the economy may be entering a period of stagflation – little growth but persistent inflation. 'Combined with a 2024 Budget that ushered in more borrowing, and the current uncertainty worldwide over the inflationary impact of the tariffs threatened by Donald Trump, investors are asking for a little more return in order to lend to the UK.' David Coombs, head of multi-asset investment at Rathbones Asset Management, believes higher gilt yields are not just a headache for the Chancellor. They are also detrimental to both businesses and households. He explains: 'They push up mortgage costs and other domestic loan rates. This has a negative impact on consumer spending and could tip the UK economy into recession.' As for businesses, Coombs says that higher gilt yields are particularly negative for companies with lots of debt. 'Corporate loans tend to be charged at a premium over government bond yields,' he adds. 'So as gilt yields push upwards, their cost increases and profit margins reduce – at a time when companies are already dealing with higher wages and taxes post Budget.' So, what do you need to do as an investor? Investors just don't believe that the land of milk, honey, growth, and prosperity promised by the Chancellor is deliverable. As Rachel says, it's not all bad news, especially on the cash-savings front and for those looking to turn a pension fund into a stream of lifetime income through the purchase of an annuity. Better deals for both are likely if gilt yields stay where they are – or edge higher. For example, savings bank Aldermore has already tickled up rates for those taking out new fixed-rate savings bonds. For those managing an investment portfolio – either ahead of (or in) retirement – the current financial market hiatus is also not a one-way 'bad news' ticket. While experts are divided about the outlook for UK equities, they are unanimous about the attraction of locking into attractive UK gilt yields. Kumar of 7IM says: 'Rising government bond yields may be a thumping headache for Labour, but they provide a great chance for investors to lock into some chunky returns.
ECONOMICS INVESTING UK LABOR PARTY RACHEL REEVE FINANCIAL MARKETS BORROWING COSTS POUND STERLING
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