Pound and gilts slide after Labour borrowing binge sparks market backlash

Sterling tumbled and gilt yields rose again as investors baulked at Labour's latest borrowing binge, with the government borrowing another £18 billion last month as it ramps up spending. The move underscored concerns that the fiscal dynamic under Chancellor Rachel Reeves is widening the gap between revenue and outlays, prompting critics to argue that public finances are not on a sustainable path. The borrowing figure arrived even as the Bank of England held policy steady at 4%, signaling that rate settings are not enough, on their own, to stabilize sentiment around the currency and debt costs.

The Chancellor has now overseen borrowing of £83.8 billion in the first five months of the fiscal year, about £11.4 billion more than forecast, illustrating a spending trajectory that outpaces tax take. That gap has fed a narrative of a gaping hole in Reeves’s Budget plans and has set the scene for expectations of further tax measures and more borrowing when the autumn Budget is unveiled in November. Analysts caution that adding more debt in a fragile economy could create a doom loop, in which higher borrowing costs chill growth and deepen the fiscal gap.

On the market front, the pound slid around 0.5% against the US dollar to as low as $1.3460, with traders noting that it had traded at about $1.3726 just days earlier, its highest in more than two months. The decline came despite the Bank of England leaving interest rates unchanged at 4% on Thursday, underscoring that higher rates have historically offered some support to a currency. But many analysts said the pound remains out of favour as Reeves faces questions about how to reestablish credibility around the economy and public finances.

Borrowing costs also spiked on global bond markets, with the 10-year gilt yield approaching 4.73% and the 30-year yield topping 5.56%. British bond yields are the highest in the G7, increasing the cost of debt service relative to peers and complicating the government’s fiscal arithmetic. Traders have also taken out what some describe as their biggest bets against the pound in the three years since Liz Truss's economic meltdown, a sign that investors require a higher risk premium to hold UK debt.

Lale Akoner, global analyst at trading firm Etoro, said investors are actively demanding a higher risk premium for UK debt, reflecting a lack of confidence in the short- and medium-term fiscal trajectory. The surge in yields, in turn, raises the cost of borrowing for the government and can ripple through the wider economy by pushing up mortgage and loan rates.

The bond-market repricing occurs alongside political and fiscal headaches. Reeves is widely expected to raise taxes and to sanction further borrowing in November’s Budget, positioning the government for a tighter path than in recent months. Russ Mould, investment director at AJ Bell, cautioned that the clock is ticking for the government to demonstrate that its finances can be steered toward a credible path, noting that market sentiment will not rebound quickly if the plan remains unclear.

In a separate Istat-like release, the Office for National Statistics said that interest payments on the £2.7 trillion national debt reached £8.4 billion last month, underscoring the growing burden of servicing debt amid higher yields. Ashley Webb, an economist at Capital Economics, described Reeves’s fiscal position as trickier than before and suggested that the government’s room to maneuver without additional revenues is narrowing.

The combination of higher borrowing, stubbornly high yields and a weakened currency complicates the government’s aim to support a faltering economy while restraining tax increases. As markets assess the sustainability of Reeves’s plan, investors will be watching for signals about whether November’s Budget will deliver a credible path to balance the books without triggering a broader downturn. With Britain facing pressure from both domestic and global headwinds, the path to financial stability remains uncertain, even as the Bank of England maintains its current rate stance.