Gilt markets would react aggressively if it is determined that Chancellor Rachel Reeves misled Parliament and the public on the true state of the public finances, or if she is forced to resign.
This is the warning from Nigel Green, CEO of global financial advisory giant deVere Group as Reeves is facing calls from MPs to explain why she had repeatedly warned about a downgrade to the UK’s economic productivity forecasts – including in a speech on 4 November – ahead of last Wednesday’s Budget.
It has since emerged the Office for Budget Responsibility (OBR) told her in mid-September the public finances were in better shape than widely thought, with Reeves omitting to mention a forecast of higher wages.
Prime Minister Sir Keir Starmer is expected to back Reeves’ budget decisions in a speech on Monday,
Nigel Green says: “When debt servicing costs are already this high, investors have very little tolerance for uncertainty. If confidence in fiscal leadership is damaged, gilts sell off quickly and the price of funding the state rises.”
Markets have a recent reference point. Over the summer, a period of visible political strain triggered abrupt moves in UK assets. Sterling weakened sharply and gilt yields jumped when investors sensed hesitation and lack of unified backing at the top of government. No policy overhaul was required. The perception of instability alone was sufficient to reprice risk.
Nigel Green says: “The summer showed how fast markets react when authority looks fragile. “Investors saw uncertainty and immediately demanded a higher return for holding UK debt. That episode is fresh in bond managers’ minds.”
The current controversy goes further by challenging the integrity of the fiscal story itself. Ahead of the Budget, repeated warnings were made about tightening headroom and the need for tough decisions.
Since then, it has emerged that official forecasters had already told the Treasury the baseline position was stronger than widely assumed, with wage growth and revenues offering more support than the public narrative suggested. The chancellor disputes the accusation, but for markets the question is binary: was the picture complete or not.
Nigel Green says: “Bond markets aren’t interested in political theatre. They ask whether the information set was full and balanced. If investors conclude it was not, they reprice gilts for higher governance risk.”
Fiscal headroom is central to this assessment. Investors treat headroom as the buffer that protects fiscal rules from adverse surprises such as weaker growth or persistent inflation. When that buffer narrows sharply, markets expect transparency around all the moving parts. If later disclosures suggest material offsets were downplayed, the credibility premium attached to gilts erodes.
Nigel Green continues: “Headroom tells investors how shock-resistant the budget is. When confidence in that number is weakened, yields rise to compensate.
“A resignation would intensify the reaction. Markets would immediately price uncertainty over succession, continuity of fiscal rules and the durability of tax and spending plans. Even if a replacement reaffirmed existing policy, the interlude alone would prompt higher borrowing costs, as seen repeatedly in the UK and abroad.
“Leadership disruption at the Treasury automatically injects doubt. Until there is clarity on who is in charge and whether policy holds, gilts carry an added premium.
“International bond investors can move capital easily. If the UK injects doubt into its fiscal framework, money will flow elsewhere.”
The consequences would not stop at the gilt market. Higher government yields feed directly into mortgage rates, corporate borrowing costs and pension scheme valuations. Financial conditions tighten rapidly, placing pressure on households and businesses already sensitive to borrowing costs.
Nigel Green says: “A gilt sell-off is never contained. It flows through to mortgages, business finance and pensions, and it does so fast.
“Markets respond positively to credibility, consistency and stability. The summer proved how little distance exists between political uncertainty and market stress. Any confirmation that Parliament or the public were misled, or any forced exit from the Treasury, would reopen that channel immediately.
Nigel Green concludes: “The gilt market runs on trust. Preserve it through clarity and stability and borrowing costs remain contained. Damage it, and the correction is swift and unforgiving.”
