Markets Rattle as Reeves Faces Fiscal Firestorm: UK Bonds, Pound Slide Amid Budget Uncertainty

UK financial markets took a sharp hit on July 2, 2025, as investor anxiety mounted over Finance Minister Rachel Reeves’ fiscal credibility and political standing. The FTSE 250 fell 1.3%, while 10-year gilt yields surged to 4.66%, reflecting a broad selloff in government bonds. The pound dropped 0.6% against the dollar, extending a three-day slide that has drawn comparisons to the 2022 “mini-budget” crisis.

 

The turmoil was triggered by a series of events: Reeves appeared visibly distressed during a parliamentary session, prompting speculation about her leadership. The government also scaled back planned welfare cuts, undermining earlier fiscal projections. Meanwhile, the Office for Budget Responsibility (OBR) admitted to overestimating economic growth, blowing an £18 billion hole in Reeves’s upcoming budget.

 

Key Highlights:

 

Bond Yields Spike: 10-year gilts hit 4.66%, highest since 2008; 30-year yields at 26-year high.

Currency Slide: Sterling weakens to $1.366 amid investor flight to safety.

OBR Admission: Forecasting error adds £18B fiscal gap; tax hikes now seen as likely.

Political Optics: Reeves’ emotional moment in Parliament sparks concern; PM Starmer affirms support.

Market Sentiment: Analysts warn of “austerity optics” if Reeves resorts to spending cuts.

Global Context: Rising US Treasury yields and Trump’s policy outlook add external pressure.

 

Despite the turbulence, Cabinet officials insist Reeves retains full confidence of the government and will outline a revised economic strategy in the coming weeks.

 

Sources: Reuters, MarketScreener, Investing.com, The Telegraph