Reflecting on the events of July 2, when a tearful Rachel Reeves was escorted from the Commons chamber following the breakdown of welfare reforms, may initially appear harsh. However, this incident has gained significance as a pivotal moment amidst the volatile bond markets that have characterized the 18 months since Labour assumed power with a commanding majority.

The fluctuations in the gilts market have been interpreted, possibly with the influence of Treasury spin-doctors, as an indication that traders were speculating about the Chancellor’s potential dismissal. This speculation has contributed to a narrative portraying Reeves as untouchable within her role.

From the perspective of investors, her steadfast commitment to stringent fiscal policies is perceived as crucial in preventing a repeat of the market turmoil experienced during the Liz Truss era, when bond and foreign exchange markets spiraled out of control.

Offering a different perspective, the Left-leaning New Statesman clarifies that bond dealers were hesitant to act on unverified rumors on that day in July, as doing so would have amounted to market abuse. This insight adds depth to the understanding of the market’s reaction and the underlying dynamics at play.

As far as investors were concerned, her determination to stick with iron-clad fiscal rules is all that stands between Britain and another Liz Truss moment, when the bond and foreign exchange markets went haywire.

The Leftist New Statesman offers a corrective. It reports that bond dealers were reluctant to trade on a rumour, rather than a fact, on that July day because it would have constituted market abuse.

Budget raid: The wobble in the gilts market has been interpreted, perhaps with the help of Treasury spin-doctors, as a signal that traders feared the Chancellor was for the chop

Gilts became volatile because of a lack of liquidity. It was not a vote of confidence in Reeves. Tomorrow, the bond, foreign exchange and equity markets will be equipped with hundreds of pages of facts and rhetoric when the Chancellor delivers her Budget.

The key measure is likely to be the amount of headroom (future budgetary space) which the Chancellor plans to create with tax rises. 

Her second autumn Budget, which breaches the promise of a year ago ‘not to come back for more’, will need to pass a credibility test.

Does she have the wherewithal to deliver what will be a combination of revenue raising and spending cuts? 

And will goodies for the backbenchers, in the shape of lifting the two-child benefit cap, be sufficient to head off further rebellions?

Historically, gilts could be largely relied upon to remain stable on Budget day. But much has changed.

Firstly, the scale of the Budget deficit and the financing requirement has escalated. At £299.6billion in 2025-26, it is at scary levels. The combination of the great

financial crisis, Covid-19 and the cost of subsidising energy after Russia invaded Ukraine has taken deficits and debt to new heights.

Surging welfare, pension and defence costs mean they are likely to remain stubbornly high, too.

The second factor is the changing structure of bond ownership. In the past, Britain’s great investing institutions, corporate pension funds and insurers, could be relied upon to snap up the gilt issue and hang on for the long-term. 

Among the reasons that the UK is lumbered with around a quarter of its debt in bonds indexed to inflation is that such instruments were demanded by big players.

All that is changing. The decline of ‘gold-plated’ defined benefit pension funds and the private sector choice of defined contribution schemes encourage more equity investment.

More is the pity that much of it has headed overseas, particularly to the US. Moreover, after the Truss experience and the implosion of liability driven assets – derivatives built on gilts – the safety of UK bond markets is questioned more.

Adding to the volatility is that pension companies, such as L&G, choose to make a turn by investing in higher yielding corporate bonds.

All of this means that as much as 50 per cent of the stock of UK gilt issuance ends up in the hands of foreign governments and hedge funds.

It was former governor of the Bank of England Mark Carney (now Canadian prime minister) who famously cautioned that the fate of Britain depended on the ‘kindness of strangers’.

This wouldn’t matter were those strangers overseas investors from the Gulf and Norway’s wealth funds who remarkably have faith in Britain.

Many of the external investors are ‘macro’ hedge funds which live and die by taking huge bets on national economies.

In the same way as George Soros bet against the pound in 1992 – forcing the UK out of exchange rate mechanism, the precursor of the euro – so hedge funds (global giants Apollo and Citadel come to mind) have a say on British economic policy.

They must be obeyed.

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