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As the dust settles on a tumultuous week for gilts (UK government bonds) and sterling – a week that has raised serious questions about chancellor Rachel Reeves’s stewardship of the economy – the big question many people will be asking is why investor sentiment has shifted so much against the UK in the past week.

Following on from that is what Ms Reeves should try to do about it.

The first point to make – and indeed it is one the government has been making – is that there has been a broad sell-off in government bonds around the world this week. Yields, which go up as the price of a bond falls, have been rising not only in the case of gilts but also on bonds issued by the likes of the US, Japan, France and Germany.

That reflects the fact that investors are changing their assumptions about the path of inflation this year and, in turn, how central banks like the US Federal Reserve, the European Central Bank and the Bank of England respond.

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Inflation is now expected to be stickier around the world due to a combination of factors, of which by far the biggest is the tariffs the incoming Trump administration is expected to introduce. Those tariffs will push up the price of goods bought by American consumers and, if America’s trading partners respond with tariffs of their own, for consumers elsewhere. US Treasuries have also been under pressure due to expectations that Mr Trump will raise US borrowing sharply.

That said, gilt yields have been rising by more than yields on their international counterparts, reflecting the fact that investors think the UK has specific issues with inflation. The increase in employer’s national insurance contributions (NICs) announced by Ms Reeves in her Halloween budget will be highly inflationary because they will push up the cost of employing people.

The chief executives of some of the UK’s biggest retailers – Lord Wolfson at Next, Ken Murphy at Tesco, Stuart Machin at Marks & Spencer and Simon Roberts at Sainsbury’s – this week repeated their warnings that these higher costs will feed through to higher prices.

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Treasury tries to calm market nerves

Another reason why gilt yields have risen more than those of their international counterparts is the UK’s particular fiscal position and its poor growth prospects.

Yes, other countries have as poor prospects for growth as the UK or as bad a debt situation. The US national debt, for example, is 123% of US GDP while Japan has a debt to GDP ratio of 250%. The UK, with a debt to GDP ratio of just under 99%, doesn’t look so bad by comparison. However, as the market in US Treasuries is the biggest and most liquid in the world and the US dollar is the global reserve currency, investors seldom have hesitation about lending to the US government. Similarly, in the case of Japan, most of its government debt is owned by Japanese savers – encapsulated by the mythical figure of ‘Mrs Watanabe’.

Read more: The market meltdown explained. Should I be worried?

The UK does not have that luxury and, accordingly, has to rely on what Mark Carney, the former governor of the Bank of England, memorably described in a 2017 speech as “the kindness of strangers” to fund its borrowing (he was talking on that occasion about the UK’s current account deficit rather than its fiscal deficit, but the point holds).

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Investors ‘losing confidence in UK’

In summary, then, investors are demanding a higher premium for the added risk of holding gilts. That perceived risk – as the former prime minister Liz Truss has gleefully been pointing out – means that yields on some gilts are now even higher than they spiked following her chancellor Kwasi Kwarteng’s ill-fated mini budget in September 2022.

Investors are also sceptical about the UK economy’s ability to grow its way out of this predicament. While the government’s proposals to invest in infrastructure have been welcomed by investors, they have also noted that much of the extra borrowing being taken on by Ms Reeves in her budget was to fund big pay rises for public sector workers, which – rightly or wrongly – are not perceived to be as good a use of government money as, say, investing in improvements to roads or power grids.

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CBI chief’s approach to budget tax shock

So what does Ms Reeves do?

Well, as the old joke about the Irishman guiding a lost tourist puts it, she “wouldn’t start from here”. The chancellor’s big mistake was to box herself in during the general election campaign by ruling out increases in income tax, employees’ national insurance, VAT or corporation tax. She could easily, for example, have promised to unwind her predecessor Jeremy Hunt’s cut in employee’s national insurance – which was rightly recognised by most voters as a pre-election bribe.

Still, she is where she is, so the chancellor’s main job now will be to convince investors that the UK is on a stable fiscal footing. With the recent rise in gilt yields – the implied government borrowing cost – threatening to eliminate the chancellor’s headroom to meet her fiscal rules, that is likely to mean public sector spending cuts or higher taxes. The former option is more likely than the latter and not least because Ms Reeves is committed to just one ‘fiscal event’ – when taxes are raised – per year and that will be her budget this autumn.

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The Bank of England is also going to have a big part to play here in reinforcing to markets its determination to bringing inflation down to its target range – which means borrowers should not expect as many interest rate cuts in 2025 as they were, say, six months ago.

The Bank may also slow the pace at which it is selling its own gilt holdings (accumulated largely during the ‘quantitative easing’ on which it embarked after the global financial crisis) which would also ease the downward pressure on gilts.

Also coming to the chancellor’s aid, in all likelihood, will be a weakening in the pound which should, all other things being equal, help make gilts more appetising to international investors.

All of this underlines though, unfortunately, that there is only so much the chancellor can do.

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Primark-owner ABF gets Hovis deal oven-ready

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Primark-owner ABF gets Hovis deal oven-ready

The London-listed parent of Primark was on Wednesday applying the finishing touches to a landmark transaction that will unite the Hovis and Kingsmill bread brands under common ownership.

Sky News understands that a deal for Associated British Foods (ABF) to acquire Hovis from private equity firm Endless is likely to be announced by the end of the week.

The timetable remains subject to delay, banking sources cautioned on Wednesday.

The deal, which will see ABF paying about £75m to buy 135 year-old Hovis, is likely to trigger a lengthy review by competition regulators given that it will bring together the second- and third-largest suppliers of packaged bread to Britain’s major supermarkets.

ABF owns Kingsmill’s immediate parent, Allied Bakeries, which has struggled in recent years amid persistent price inflation, changing consumer preferences and competition from larger rival Warburtons as well as new entrants to the market.

Confirmation of the tie-up will come three months after Sky News revealed that ABF and Endless – Hovis’s owner since 2020 – were in discussions.

Industry sources have estimated that a combined group could benefit from up to £50m of annual cost savings from a merger.

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Allied Bakeries was founded in 1935 by Willard Garfield Weston, part of the family which continues to control ABF, while Hovis traces its history even further, having been created in 1890 when Herbert Grime scooped a £25 prize for coming up with the name Hovis, which was derived from the Latin ‘Hominis Vis’ – meaning ‘strength of man”.

The overall UK bakery market is estimated to be worth about £5bn in annual sales, with the equivalent of 11m loaves being sold each day.

Critical to the prospects of a merger of Allied Bakeries, which also owns the Sunblest and Allinson’s bread brands, and Hovis taking place will be the view of the Competition and Markets Authority (CMA) at a time when economic regulators are under intense pressure from the government to support growth.

Warburtons, the family-owned business which is the largest bakery group in Britain, is estimated to have a 34% share of the branded wrapped sliced bread sector, with Hovis on 24% and Allied on 17%.

A merger of Hovis and Kingsmill would give the combined group the largest share of that segment of the market, although one source said Warburtons’ overall turnover would remain higher because of the breadth of its product range.

Responding to Sky News’ report in May of the talks, ABF said: “Allied Bakeries continues to face a very challenging market.

“We are evaluating strategic options for Allied Bakeries against this backdrop and we remain committed to increasing long-term shareholder value.”

Prior to its ownership by Endless, Hovis was owned by Mr Kipling-maker Premier Foods and the Gores family.

At the time of the most recent takeover, High Wycombe-based Hovis employed about 2,700 people and operated eight bakery sites, as well as its own flour mill.

Hovis’s current chief executive, Jon Jenkins, is a former boss of Allied Milling and Baking.

ABF declined to comment, while neither Endless nor Hovis could be reached for comment.

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Chancellor warned ‘substantial tax rises’ needed – as she faces ‘impossible trilemma’

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Chancellor warned 'substantial tax rises' needed - as she faces 'impossible trilemma'

Rachel Reeves will need to find more than £40bn of tax rises or spending cuts in the autumn budget to meet her fiscal rules, a leading research institute has warned.

The National Institute of Economic and Social Research (NIESR) said the government would miss its rule, which stipulates that day to day spending should be covered by tax receipts, by £41.2bn in the fiscal year 2029-30.

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In its latest UK economic outlook, NIESR said: “This shortfall significantly increases the pressure on the chancellor to introduce substantial tax rises in the upcoming autumn budget if she hopes to remain compliant with her fiscal rules.”

The deteriorating fiscal picture was blamed on poor economic growth, higher than expected borrowing and a reversal in welfare cuts that could have saved the government £6.25bn.

Together they have created an “impossible trilemma”, NIESR said, with the chancellor simultaneously bound to her fiscal rules, spending commitments, and manifesto pledges that oppose tax hikes.

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The institute urged the government to build a larger fiscal buffer through moderate but sustained tax rises.

“This will help allay bond market fears about fiscal sustainability, which may in turn reduce borrowing costs,” it said.

“It will also help to reduce policy uncertainty, which can hit both business and consumer confidence.”

It said that money could be raised by reforms to council tax bands or, in a more radical approach, by replacing the whole council tax system with a land value tax.

To reduce spending pressures, NIESR called for a greater focus on reducing economic inactivity, which could bring down welfare spending.

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Growth to remain sluggish

The report was released against the backdrop of poor growth, with the chancellor struggling to ignite the economy after two months of declining GDP.

The institute is forecasting modest economic growth of 1.3% in 2025 and 1.2% in 2026. That means Britain will rank mid-table among the G7 group of advanced economies.

‘Things are not looking good’

However, inflation is likely to remain persistent, with the consumer price index (CPI) likely to hit 3.5% in 2025 and around 3% by mid-2026. NIESR blamed sustained wage growth and higher government spending.

It said the Bank of England would cut interest rates twice this year and again at the beginning of next year, taking the rate from 4.25% to 3.5%.

Persistent inflation is also weighing on living standards: the poorest 10% of UK households saw their living standards fall by 1.3% in 2024-25 compared to the previous year, NIESR said. They are now 10% worse off than they were before the pandemic.

Professor Stephen Millard, deputy director for macroeconomics at NIESR, said the government faced tough choices ahead: “With growth at only 1.3% and inflation above target, things are not looking good for the chancellor, who will need to either raise taxes or reduce spending or both in the October budget.”

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Ofwat chief Black to step down ahead of watchdog’s abolition

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Ofwat chief Black to step down ahead of watchdog's abolition

The chief executive of Ofwat is to step down within months as Britain’s embattled water regulator prepares to be abolished by ministers.

Sky News has learnt that David Black is preparing to leave Ofwat following discussions with its board, led by chairman Iain Coucher.

The timing of Mr Black’s exit was unclear on Tuesday afternoon, although sources said he was likely to go in the near future.

An official announcement could come within days, according to industry sources.

Insiders say the relationship between Mr Coucher and Mr Black has been under strain for some time.

Water industry executives said that Steve Reed, the environment secretary, repeatedly referred to the regulator’s leadership during a meeting last month.

It was unclear on Tuesday who would replace Mr Black, or whether an interim chief executive would remain in place until Ofwat is formally scrapped.

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The complexity of the impending regulatory shake-up means that Ofwat might not be formally abolished until at least 2027.

Mr Black took over as Ofwat’s permanent boss in April 2022, having held the position on an interim basis for the previous 12 months.

He has worked for the water regulator in various roles since 2012.

If confirmed, Mr Black’s departure will come with Britain’s privatised water industry and its regulator mired in crisis.

Water companies are under increasing pressure from Mr Reed, the environment secretary, over their award of executive bonuses even as the number of serious pollution incidents has soared.

The UK’s biggest water utility, Thames Water, meanwhile, is on the brink of being temporarily nationalised through a special administration regime as it tries to secure a private sector bailout led by its creditors.

In a review published last month, the former Bank of England deputy governor Sir Jon Cunliffe recommended that Ofwat be scrapped.

He urged the government to replace it with a new body which would also incorporate the Drinking Water Inspectorate and absorb the water-related functions of the Environment Agency and Natural England.

Speaking on the day that Sir Jon’s recommendations were made public, Mr Reed said: “This Labour government will abolish Ofwat.

“Ofwat will remain in place during the transition to the new regulator, and I will ensure they provide the right leadership to oversee the current price review and investment plan during that time.”

A white paper on reforming the water industry is expected to be published in November with the aim of delivering a reset of the industry’s performance and supervision, according to industry sources.

A handful of water companies have challenged Ofwat’s price determinations, which in aggregate outlined £104bn in spending by the industry during the 2026-30 regulatory period.

Anglian Water, Northumbrian Water and Southern Water are among those whose spending plans are now being assessed by the Competition and Markets Authority.

Responding to the Cunliffe report last month, Ofwat said: “While we have been working hard to address problems in the water sector in recent years, this report sets out important findings for how economic regulation is delivered and we will develop and take this forward with government.

“Today marks an opportunity to reset the sector so it delivers better outcomes for customers and the environment.

“Ofwat will now work with the government and the other regulators to form this new regulatory body in England and to contribute to discussions on the options for Wales set out in the report.

“In advance of the creation of the new body, we will continue to work hard within our powers to protect customers and the environment and to discharge our responsibilities under the current regulatory framework.”

Ofwat has been contacted for comment about Mr Black’s future, while the Department for Environment, Food and Rural Affairs (DEFRA) has also been approached for comment.

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