US jobs data helps reverse UK bond crisis

Worse-than-expected US jobs data yesterday added to market turmoil in Britain, fueled by this week’s budget.

Official figures show the world’s largest economy created just 12,000 jobs in October, the lowest level in almost four years, and far below the 113,000 economists had expected.

That reinforced 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 figures were skewed by the impact of hurricanes and strikes, and experts said it did not give voters a clear picture of whether the economy as a whole was performing better.

However, they did help reverse the sell-off in UK bond yields and the pound that emerged after Rachel Reeves’ debut Autumn Budget.

Investors are concerned that the Chancellor’s plans to borrow an extra £162 billion over the next five years to fund spending could fuel inflation.

That could slow the pace of interest rate cuts by the Bank of England – at a time when both the Fed and the European Central Bank have been cutting rates more quickly.

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

Ten-year government bonds rose above 4.5 percent on Thursday, reaching their highest level in a year.

By mid-September they were as low as 3.75 percent, before Labor began making clear it was preparing to change debt rules so it could embark on a new borrowing binge.

Yesterday, government bond yields spiked again in early trading before falling back to almost 4.4 percent.

But despite the quieter end to yesterday’s trading, 10-year government bonds – whose prices fall as yields rise – still had their worst week yet this year, with yields rising 0.2 percentage points.

The damage was even greater for two-year government bonds, which suffered their worst week since June 2023.

The pound also staged a pullback yesterday, rising a cent to almost $1.30 against the US dollar in volatile trading. In the wake of the budget, the rate had fallen almost $1.28.

The market reaction led some to draw comparisons to Liz Truss’s disastrous 2022 mini-Budget, which resulted in a bond market collapse and ultimately cost the Prime Minister her job.

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

Data from fund network Calastone showed a record £2.71bn of fund withdrawals last month as investors anticipated a rise in capital gains tax in the Budget, which would hit profits from sales.