""If the bond market reacts very badly, the government will have to react if bond yields start to go up too much," Zahn said. "It could force her hand to do a secondary budget." He added that yields on 10-year or 30-year UK government bonds reaching 6% would be "unsustainable", warning of a potential "death spiral" if borrowing costs rose too far."
""If she's not going to tackle any of the big taxes, I don't see what she can do that the market will go 'fantastic, you fixed it'," he said. "She's not doing any spending cuts." The warning follows reports that Reeves has abandoned a plan to raise income tax - a move Zahn argued "markets would have taken very well" as a sign of serious fiscal tightening."
Bond markets may force the chancellor to deliver a second budget if investors react negatively to next week's fiscal plans. A sharp market reaction could push up gilt yields sharply and prompt emergency government adjustments. Ten-year yields trade around 4.53% and 30-year gilts at 5.35%, after earlier highs. Market confidence is reduced by limited scope for spending cuts and the abandonment of an income-tax rise. A freeze of tax thresholds and smaller tax increases may raise revenue, but those measures may not signal sufficient fiscal tightening to calm bond investors.
Read at Business Matters
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