Bond yields spike before Starmer reaffirms full support
Markets were rocked Wednesday by the emotional breakdown of U.K. Chancellor Rachel Reeves during a heated session in Parliament, raising fears of her potential resignation and broader instability within Prime Minister Keir Starmer’s Labour government. The pound dropped sharply and bond yields surged as traders speculated over a possible leadership shake-up at the Treasury.
Reeves, who was visibly emotional during Prime Minister’s Questions, left the House of Commons in tears as Starmer failed to immediately back her when challenged by the opposition. The moment triggered a wave of uncertainty in financial markets, with U.K. 10-year gilt yields spiking and sterling falling against both the dollar and the euro.
Starmer moves to calm turmoil, backs fiscal rules
With pressure mounting, a spokesperson later attributed Reeves’ distress to a “personal matter.” By Thursday morning, Starmer had reiterated his full support for the chancellor in interviews with the BBC and Sky News, and the two appeared together at a public event. “I have every faith in my chancellor,” Starmer said, crediting Reeves for critical economic decisions taken over the past year.
The show of unity appeared to steady investor nerves. The FTSE 100 rose 0.5%, the pound regained ground, and bond yields dropped by 6 basis points. But the episode highlighted just how fragile confidence in the government’s economic strategy has become.
Fiscal headwinds, backbench pressure intensify
Reeves has anchored Labour’s economic credibility on two fiscal rules: funding day-to-day spending with tax revenue, and reducing public debt as a share of GDP by 2029-30. But these self-imposed constraints are coming under intense strain.
After multiple welfare policy reversals, including a recent U-turn on disability benefits, Reeves must either find new spending cuts, raise taxes, or risk breaching her own borrowing rules. With minimal fiscal headroom left, the chancellor faces hard choices that could alienate voters or spook markets.
Max Wilson, director at Whitehouse Communications, warned the government’s strategy is “in absolute dire straits.” He noted that Reeves is in an impossible position: “Finding the extra money without resorting to borrowing or tax hikes will be nearly unworkable. The Treasury is out of room to maneuver.”
Backbench rebellion risks growing
Beyond the economic pressure, Starmer now faces political challenges from within. The welfare U-turn has emboldened Labour backbenchers who may resist further cuts or unpopular reforms. Analysts say the next Autumn Budget will be a crucial moment for the government’s credibility with both markets and the public.
Simon Pittaway of the Resolution Foundation stressed the need to stick to fiscal rules to maintain market confidence. “Depending on the government’s priorities, some combination of higher taxes and lower spending may be the only viable path forward,” he said.
