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UK bond yields fall as markets welcome Starmer’s backing of Reeves

by July 3, 2025
July 3, 2025
UK bond yields fall as markets welcome Starmer’s backing of Reeves

UK government bond markets steadied on Thursday morning after Keir Starmer publicly reaffirmed his support for Chancellor Rachel Reeves, easing investor concerns over fiscal stability in the wake of rising borrowing costs.

The rally comes after a sharp sell-off in UK gilts earlier this week, which saw yields on long-dated bonds surge amid speculation that a change in chancellor might lead to looser fiscal policy and higher government borrowing.

In early trading, the yield on 30-year UK government bonds dropped by 0.8%, falling to 5.361% from Wednesday’s closing level of 5.408%. The move suggests renewed confidence in the government’s commitment to fiscal discipline, following Starmer’s endorsement of Reeves as the architect of Labour’s economic plan.

Meanwhile, 10-year gilt yields also retreated, slipping three basis points to 4.55% from 4.58%. Yields on two-year and five-year bonds have edged lower too, as investors bought back into the market after the midweek turmoil.

The calmer mood in the bond markets follows a volatile session on Wednesday, when yields soared amid concerns over how the government plans to plug a multi-billion pound shortfall in the public finances. The surge in borrowing costs came as investors digested new economic data, tax pressures, and speculation about Labour’s fiscal stance.

While the rebound in bond prices offers temporary relief for the Treasury, analysts say markets remain watchful. Traders are still looking for clear signals on how Labour intends to address the UK’s widening budget gap, while upholding its pledge to invest in public services and infrastructure without breaching its self-imposed fiscal rules.

“Markets were spooked by the idea that Reeves might be replaced or sidelined,” said one analyst at a leading investment bank. “Starmer’s firm backing restores some confidence that the government remains committed to a fiscally responsible path.”

Rachel Reeves, the first female Chancellor of the Exchequer, has consistently pledged to maintain tight fiscal control, vowing not to raise income tax, National Insurance or VAT, and committing to strict borrowing rules. However, she has also pledged increased capital investment to drive growth and tackle structural issues in the UK economy, creating tension between political ambition and fiscal constraints.

The bond market’s reaction underscores how sensitive investors remain to any signs of wavering discipline from the Treasury, particularly with public sector debt levels approaching record highs and interest payments on government borrowing already consuming a large share of the national budget.

While Thursday’s rally indicates some confidence has been restored, much will hinge on the government’s next fiscal event and whether it outlines a credible plan to close the funding gap. In the meantime, the drop in yields may ease some of the short-term pressure on mortgage rates and wider financial markets, which had reacted nervously to recent volatility in gilts.

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UK bond yields fall as markets welcome Starmer’s backing of Reeves

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