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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.

Money latest: Pound hit steadies as chancellor considers spending cuts

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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Bodycare to close 56 remaining stores – with nearly 450 to be made redundant

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Bodycare to close 56 remaining stores - with nearly 450 to be made redundant

High Street beauty chain Bodycare is to close its 56 remaining stores, resulting in 444 redundancies, administrators have said.

Last week it announced the closure of 30 shops, having collapsed into administration earlier this month.

A shortage of stock and the cost of running stores meant it was no longer viable to keep its 115 stores open, administrators said at the time.

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Trump reveals Rupert and Lachlan Murdoch could be involved in TikTok deal

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Trump reveals Rupert and Lachlan Murdoch could be involved in TikTok deal

Donald Trump has revealed that media mogul Rupert Murdoch and his son Lachlan could be part of a deal in which TikTok in the United States will come under American control.

The US president also namedropped Michael Dell, the founder and CEO of Dell Technologies, as a possible participant in the deal during an interview with Fox News, which is owned by the Murdochs.

“I think they’re going to be in the group. A couple of others. Really great people, very prominent people,” Mr Trump said. “And they’re also American patriots, you know, they love this country. I think they’re going to do a really good job.”

Mr Trump said that Larry Ellison, founder and CEO of software firm Oracle, was part of the same group. His involvement in the potential TikTok deal had previously been revealed.

President Donald Trump speaking to reporters outside the White House. Pic: AP/Mark Schiefelbein
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President Donald Trump speaking to reporters outside the White House. Pic: AP/Mark Schiefelbein

White House press secretary Karoline Leavitt said on Saturday that Oracle would be responsible for the app’s data and security, with Americans set to control six of the seven seats for a planned TikTok board.

This comes after Mr Trump said he and China’s Xi Jinping held a “very productive call” on Friday, discussing the final approval for the TikTok deal, much of which is still unknown.

Once confirmed, the deal should stop TikTok from being banned in the US after lawmakers decided it posed a security risk to citizens’ data.

More on Tiktok

Officials warned that the algorithm TikTok uses is vulnerable to manipulation by Chinese authorities, who can use it to push specific content on the social media platform in a way that is difficult to detect.

Congress had ordered the app shut down for American users by January 2025 if its Chinese owner ByteDance didn’t sell its assets in the country – but the ban has been delayed four times by President Trump.

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Mr Trump said on Sunday that he might be “a little prejudiced” about TikTok, after telling reporters on Friday: “I wasn’t a fan of TikTok and then I got to use it and then I became a fan and it helped me win an election in a landslide.”

After the call with Mr Xi, Mr Trump said in a Truth Social post: “We made progress on many very important issues, including Trade, Fentanyl, the need to bring the War between Russia and Ukraine to an end, and the approval of the TikTok Deal.”

Mr Trump later told reporters at the White House that Xi had approved the deal, but said it still needed to be signed.

Representatives for the Murdochs, Mr Dell and Mr Ellison have not yet commented on a potential TikTok deal.

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Gatwick second runway given green light by government

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Gatwick second runway given green light by government

Gatwick’s second runway has been given the go-ahead by the government.

The northern runway already exists parallel to Gatwick‘s main one, but cannot be used at the same time, as it is too close.

It is currently limited to being a taxiway and is only used for take-offs and landings if the main one has to shut.

The £2.2bn expansion project will see it move 12 metres north so both can operate simultaneously, facilitating 100,000 extra flights a year, 14,000 jobs, and £1bn a year for the economy.

It would also mean the airport could process 75 million passengers a year by the late 2030s.

Gatwick is already the second busiest airport in the UK, and the busiest single runway airport in Europe.

No public money is being used for the expansion plan, which airport bosses say could see the new runway operational by 2029.

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The expansion was initially rejected by the Planning Inspectorate over concerns about its provisions for noise prevention and public transport connections.

Campaigners also argued the additional air traffic will be catastrophic for the environment and the local community.

A revised plan was published by the planning authority earlier this year, which it said could be approved by the government if all conditions were met.

The government says it is now satisfied this is the case, with additions made including Gatwick being able to set its own target for passengers who travel to the airport by public transport – instead of a statutory one.

Nearby residents affected by noise will also be able to charge the airport for the cost of triple-glazed windows.

And people who live directly under the flight path who choose to sell their homes could have their stamp duty and estate agent fees paid for up to 1% of the purchase price.

CAGNE, an aviation and environmental group in Sussex, Surrey, and Kent, says it still has concerns about noise, housing provision, and wastewaster treatment.

The group says it will lodge a judicial review, which will be funded by local residents and environmental organisations.

‘Disaster for the climate crisis’

Green Party leader Zack Polanski criticised the second runway decision, posting on X: “Aviation expansion is a disaster for the climate crisis.

“Anyone who’s been paying any attention to this shambles of a Labour Govenrment (sic) knows they don’t care about people in poverty, don’t care about nature nor for the planet. Just big business & their own interests.”

Friends of the Earth claimed the economic case for the airport expansion has been “massively overstated”.

Head of campaigns Rosie Downes warned: “If we’re to meet our legally-binding climate targets, today’s decision also makes it much harder for the government to approve expansion at Heathrow.”

Shadow transport secretary Richard Holden welcomed the decision but said it “should have been made months ago”, claiming Labour have “dithered and delayed at every turn”.

“Now that Gatwick’s second runway has been approved, it’s crucial Labour ensures this infrastructure helps drive the economic growth our country needs,” he said.

A government source told Sky News the second runway is a “no-brainer for growth”.

“The transport secretary has cleared Gatwick expansion for take-off,” they said. “It is possible that planes could be taking off from a new full runway at Gatwick before the next general election.

“Any airport expansion must be delivered in line with our legally binding climate change commitments and meet strict environmental requirements.”

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