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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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TalkTalk Group picks bankers to spearhead break-up

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TalkTalk Group picks bankers to spearhead break-up

TalkTalk Group has picked advisers to spearhead a break-up that will lead to the sale of one of Britain’s biggest broadband providers.

Sky News has learnt that PJT Partners, the investment bank, is being lined up to handle a strategic review aimed at assessing the optimal timing for a disposal of TalkTalk’s remaining businesses.

PJT’s appointment is expected to be finalised shortly, City sources said this weekend.

Founded by Sir Charles Dunstone, the entrepreneur who also helped establish The Carphone Warehouse, TalkTalk has 3.2 million residential broadband customers across the UK.

That scale makes it one of the largest broadband suppliers in the country, and means that Ofcom, the telecoms industry regulator, will maintain a close eye on the company’s plans.

The break-up is expected to take some time to complete, and will involve the separate sales of TalkTalk’s consumer operations, and PlatformX, its wholesale and network division.

Within the latter unit, TalkTalk’s ethernet subsidiary could also be sold on a standalone basis, according to insiders.

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TalkTalk, which has been grappling with a heavily indebted balance sheet for some time, secured a significant boost during the summer when it agreed a £120m capital injection.

The bulk of those funds came from Ares Management, an existing lender to and shareholder in the company.

That new funding followed a £1.2bn refinancing completed late last year, but which failed to prevent bondholders pushing for further moves to strengthen its balance sheet.

Over the last year, TalkTalk has slashed hundreds of jobs in an attempt to exert a tighter grip on costs.

It also raised £50m from two disposals in March and June, comprising the sale of non-core customers to Utility Warehouse.

In addition, there was also an in-principle agreement to defer cash interest payments and to capitalise those worth approximately £60m.

The company’s business arm is separately owned by TalkTalk’s shareholders, following a deal struck in 2023.

Read more:
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Estate agent LRG eyes £800m sale amid spectre of budget tax raid

TalkTalk was taken private from the London Stock Exchange in a £1.1bn deal led by sister companies Toscafund and Penta Capital.

Sir Charles, the group’s executive chairman, is also a shareholder.

The company is now run by chief executive James Smith.

The identity of suitors for TalkTalk’s remaining operations was unclear this weekend, although a number of other telecoms companies are expected to look at the consumer business.

Britain’s altnet sector, which comprises dozens of broadband infrastructure groups, has been struggling financially because of soaring costs and low customer take-up.

On Saturday, a TalkTalk spokesman declined to comment.

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Estate agent LRG eyes £800m sale amid spectre of Budget tax raid

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Estate agent LRG eyes £800m sale amid spectre of Budget tax raid

One of Britain’s biggest estate agency groups is drawing up plans for an £800m sale amid speculation that Rachel Reeves, the chancellor, is plotting a fresh tax raid on homeowners in her autumn Budget.

Sky News has learnt that LRG, which is owned by the American buyout firm Platinum Equity, is being groomed for an auction that would take place during the coming months.

Bankers at Rothschild have been appointed by Platinum to oversee talks with potential bidders.

Platinum acquired LRG, which owns brands including Acorn, Chancellors and Stirling Ackroyd, in January 2022.

The estate agency group, which handles residential sales and lettings, trades from more than 350 branches and employs approximately 3,500 people.

City sources said this weekend that Platinum believed a valuation for the business of well over £700m was achievable in a sale.

The US-based private equity investor bought LRG – then known as Leaders Romans Group – from Bowmark Capital, a smaller buyout firm.

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Bidders in this auction are also likely to include financial investors.

Some of LRG’s brands have a long history in the UK property industry, with Portico tracing its origins as far back as 1818.

The company, now run by chief executive Michael Cook, manages 73,000 properties and last year handled property sales worth £3.6bn.

Although prospective bidders for LRG have already begun being sounded out, an auction of the group is likely to take several months to conclude.

Industries such as banking, housing and gambling have been gripped by suggestions that the chancellor will target them in an attempt to raise tens of billions of pounds in additional revenue.

Last month, house prices fell unexpectedly – albeit by just 0.1% – amid warnings from economists about the impact of speculation over a tax raid on homeowners.

Reports in the last two months have suggested that Ms Reeves and her officials at the Treasury are considering measures such as an overhaul of stamp duty, a mansion tax and the ending of primary residence relief for properties above a certain value.

Her Budget, which will take place in late November, is still more than two months away, suggesting that meaningful discussions with bidders for businesses such as LRG are unlikely to take place until the impact of new tax measures has been properly digested.

Robert Gardner, chief executive at Nationwide, the UK’s biggest building society, said reform of property taxes was overdue.

“House prices are still high compared to household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years,” he said earlier this month

Britain’s estate agency market remains relatively fragmented, with groups such as LRG spearheading myriad acquisitions of small players with fewer than a handful of branches.

Among the other larger operators in the market, Dexters – which is chaired by the former J Sainsbury boss Justin King – is also backed by private equity investors in the form of Oakley Capital.

Few estate agents now have their shares publicly traded, with the equity of Foxtons Group, one of London’s most prominent property agents, now worth just £168m.

Platinum Equity declined to comment.

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Tax rises expected as government borrowing highest in five years – latest ONS figures

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Tax rises expected as government borrowing highest in five years - latest ONS figures

Government borrowing last month was the highest in five years, official figures show, exacerbating the challenge facing Chancellor Rachel Reeves.

Not since 2020, in the early days of the COVID pandemic with the furlough scheme ongoing, was the August borrowing figure so high, according to data from the Office for National Statistics (ONS).

Money blog: Borrowers warned of wider market risk

Tax and national insurance receipts were “noticeably” higher than last year, but those rises were offset by higher spending on public services, benefits and interest payments on debt, the ONS said.

It meant there was an £18bn gap between government spending and income, a figure £5.25bn higher than expected by economists polled by Reuters.

A political headache

Also released on Friday were revisions to the previous months’ data.

More on Uk Economy

Borrowing in July was more than first thought and revised up to £2.8bn from £1.1bn previously.

For the financial year as a whole, borrowing to June was revised to £65.8bn from £59.9bn.

State borrowing costs have also risen because borrowing has simply become more expensive for the government. Interest payments rose to £8.4bn in August.

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Earlier this month: Why did UK debt just get more expensive?

It compounds the problem for Ms Reeves as she approaches the November budget, and means tax rises could be likely.

Her self-imposed fiscal rules, which she repeatedly said she will stick to, mean she must bring down government debt and balance the budget by 2030.

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Tax rises?

Ms Reeves will need to find money from somewhere, leading to speculation taxes will increase and spending will be cut.

“Today’s figures suggest the chancellor will need to raise taxes by more than the £20bn we had previously estimated,” said Elliott Jordan-Doak, the senior UK economist at research firm Pantheon Macroeconomics.

“We still expect the chancellor to fill the fiscal hole with a smorgasbord of stealth and sin tax increases, along with some smaller spending cuts.”

Sin taxes are typically applied to tobacco and alcohol. Stealth taxes are ones typically not noticed by taxpayers, such as freezing the tax bands, so wage rises mean people fall into higher brackets.

Increased employers’ national insurance costs and rising wages have meant the tax take was already up.

Responding to the figures, Ms Reeves’s deputy, chief secretary to the Treasury, James Murray, said: “This government has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest.

“Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms, and putting more money in working people’s pockets.”

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