British government bond prices fell by the most since October 2022 and the pound weakened on Wednesday, after Treasury chief Rachel Reeves appeared visibly distressed in parliament, a day after the government sharply scaled back plans to cut benefits.
Reeves has repeatedly emphasized her commitment to fiscal rules, limiting the amount Britain will borrow, and, analysts said, the market moves reflected fears that she would be replaced, creating even more uncertainty.
The yield on the 10-year government bond, or gilt, rose as much as 22 basis points on the day at one point, to 4.681%, as investors ditched U.K. debt.
That would be the largest one-day jump in the British benchmark yield since October 2022, in the aftermath of then-Prime Minister Liz Truss' chaotic fiscal announcement that cost her premiership.
The selloff hit the entire gilt curve. Thirty-year yields rose nearly 22 basis points, and 2-year yields rose 11 bps
"Gilt yields were moving up but started to spike during (Prime Minister's Questions) as Reeves looked utterly shaken," said Neil Wilson, UK investor strategist at Saxo Bank.
Prime Minister Keir Starmer's press secretary later said Reeves has his full support, and she was upset because of "a personal matter."
Investors are watching Reeves' position after the British government's U-turns on welfare reforms mean the plans will no longer save taxpayers any money and have shredded the margin Britain relies on to meet its fiscal rules, analysts said on Wednesday.
"The market is pricing in the possibility of a replacement chancellor with a more left-leaning agenda, which is spooking the bond market and waking up the bond vigilantes from their slumber," said Kathleen Brooks, research director at XTB
Sterling dropped by more than 1% against the dollar, set for its largest one-day decline since mid-June, and also weakened sharply against the euro, after Reeves appeared to wipe tears away in parliament.
The pound was last down 1% on the dollar at $1.361. The euro was up 0.6% at 86.4 pence. That would be the euro's largest one-day rise against the pound in two months.
Britain's domestically focused mid-cap index was down 1.65% on the day, sharply underperforming European stocks.
"It's about Rachel Reeves finding herself in a very difficult situation following a series of U-turns, which means that the savings that had been anticipated ... (are) not going to be had," said Dani Hewson, head of financial analysis at AJ Bell.
"What's gone on in parliament today has absolutely unsettled (investors) because what is happening is the market is becoming increasingly concerned with Reeves' position."
