UK bond rout bruises Truss as public finances rattle investors

British government bonds tumbled sharply on Wednesday as a tearful appearance by Chancellor Rachel Reeves in parliament a day after the government backed down on its welfare reforms reignited concern over Britain's finances.

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Reeves was attending Prime Minister's Questions on Wednesday following the government's decision to sharply scale back plans to cut benefits. The sharp plunge in British assets immediately drew comparisons with Liz Truss’ short-lived premiership nearly three years ago, which was derailed by a bond market selloff.

Investors are monitoring Reeves’ status after the British government's reversal on welfare reforms meant the plans would no longer save taxpayers any money, shredding the margin Britain relies on to meet its fiscal rules.

The welfare reform U-turn was “signalling that the Labour Party is a lot less concerned about what the gilt market thinks,” said Gordon Shannon, portfolio manager, TwentyFour Asset Management.

“I would have thought it was seared into politicians’ memories what happened to Liz Truss.” The yield on the IO-year government bond, or gilt, rose as much as 22 basis points on the day at one point, to 4.6818, as investors ditched British debt. It then recovered somewhat to 4.608.

At its peak, the benchmark yield was set for its largest one-day jump since October 2022, the aftermath of Truss’ chaotic package of large, unfunded tax cuts that scuttled her premiership. During the depths of the 2099 crisis, the yield on the [0-year gilt rose by 50 bps in a single day at one point.