UK borrowing costs fall as investors' nerves ease

The cost of government borrowing has fallen in early trade, partly reversing a surge prompted by the chancellor’s emotional appearance in the Commons the previous day.

The yield on UK 10-year bonds fell to 4.53%, down from 4.61% at Wednesday’s close – as markets reacted to the prime minister’s comments that he worked “in lockstep” with Rachel Reeves.

The pound, which also fell on Wednesday, recovered some ground to $1.3668, although it has not regained all the ground it lost.

One analyst told the BBC financial markets seemed to be backing the chancellor, afraid that if she left her job then fiscal discipline would disappear.

Will Walker Arnott, head of private clients at the bank Charles Stanley, told the Today programme it seemed like a “rare example of financial markets actually enhancing the career prospects of a politician”.

“I think the markets are concerned that if the chancellor goes then any fiscal discipline would follow her out the door and that would mean bigger deficits.”

Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, warned that markets were likely to remain on edge.

“The minute you put a risk premium in the marketplace, it’s very hard to take out,” he told the Today programme.

“I suspect that we will see some moderation, but we will not go back to where we were 24 hours ago.”

Reeves was at Prime Minister’s Questions on Wednesday following the government’s U-turn on plans to cut billions of pounds through welfare reforms when she became emotional and started crying.

The reversal of welfare reforms puts an almost £5bn black hole in Reeves’s financial plans.

The rise in borrowing costs was initially sparked by the feeling the chancellor might step down, seeming to indicate that the markets are supportive of her.

A Treasury spokesperson later said the chancellor was upset due to a “personal matter”.

And on Wednesday evening Prime Minister Sir Kier Starmer backed Reeves, telling BBC Radio 4’s Political Thinking with Nick Robinson he worked “in lockstep” with Reeves and she was “doing an excellent job as chancellor”.