US jobs figures help reverse UK bond rout

Worse than expected US jobs figures yesterday added to market turmoil in Britain sparked by this week’s Budget.

Official figures showed the world’s biggest economy added just 12,000 jobs in October, the lowest level for nearly four years, and far short of the 113,000 economists expected.

That firmed up expectations that the US Federal Reserve will cut interest rates by a quarter of a percentage point next week.

It was also the last major set of economic data before next week’s presidential election.

But the numbers were skewed by the impact of hurricanes and strikes, and experts said it failed to provide a clear picture for voters of whether the overall economy was doing better. However, they did help reverse a sell-off for UK bond yields and the pound that took hold after Rachel Reeves’s debut Budget.

Investors have been anxious that the Chancellor’s plans to borrow £162bn more over the next five years to fund a spending splurge could help fuel inflation. That could slow the pace of Bank of England interest rate cuts – at a time when the Fed as well as the European Central Bank have been cutting more quickly.

As a result, yields on UK bonds – known as gilts – have risen sharply, effectively adding to the cost of government borrowing.

Ten-year gilts climbed above 4.5 per cent on Thursday to hit their highest level in a year.

They had been as low as 3.75 per cent as recently as mid-September, before Labour began to make clear that it was preparing to tweak debt rules so that it could embark on a new borrowing binge. 

Yesterday, gilt yields spiked again in early trading before slipping back to nearly 4.4 per cent. 

But despite the calmer end to yesterday’s trading, ten-year gilts – whose prices fall as yields rise – still suffered their worst week so far this year, with yields up by 0.2 percentage points. 

For two-year gilt yields the damage was even bigger, as they endured their worst week since June 2023.

The pound also staged a fightback yesterday, rising by a cent to nearly $1.30 against the US dollar during volatile trading. It had sunk close to $1.28 in the wake of the Budget.

The market reaction prompted some to draw comparisons with Liz Truss’s disastrous mini-Budget in 2022 which resulted in a bond market meltdown and ultimately cost the PM her job.

Reeves said her Budget – unlike Truss’s – had been endorsed by the International Monetary Fund and the Office for Budget Responsibility.

Data from funds network Calastone showed that a record £2.71billion was withdrawn from funds last month as investors anticipated an increase in capital gains tax in the Budget that would eat into any profits from the sales.