UK bonds rally as panic eases
The bond market is looking calmer this morning, as traders welcome Keir Starmer’s endorsement of Rachel Reeves.
The prices on UK government debt are rising in early trading, which pulls down the yield (or interest rate) on the bonds.
The yield on UK 30-year bonds has dipped by 0.8% in early trading, to 5.361%. Yesterday it had surged to 5.408%, from 5.234%.
UK 10-year bond yields have also dipped by around three basis points, to 4.55% from 4.58% last night.
These moves suggests the bond markets are relieved that Starmer is standing by Reeves, easing concerns that a new chancellor might be less committed to the fiscal rules, so might look to borrow more.
But while today’s recovery eases some of the pressure on the government, it doesn’t wipe out all of Wednesday’s jump in borrowing costs – traders will be wondering how the government will patch up the multi-billion pound black hole in the public finances.
Shorter-dated two-year and five-year bond yields have also slipped back, as prices recover some ground.
Key events
US bond prices are dropping, pushing up borrowing costs, as traders bet that an early interest rate cut is unlikely.
This has pushed up the yield, or interest rate, on two-year US Treasury bonds by 9 basis points.
Investors may be calculating that the Federal Reserve will be less inclined to cut borrowing costs soon, given job creation continued at a pretty robust rate last month.
US Treasury Two-Year Yields Sharply up After Payrolls; Last 12 Bps at 3.902%；Stock Index Futures Extend Gains.
Rate Futures Now Price About an 80% Chance of a Fed Rate Cut by Sept, Down From 98% Before Jobs Report.
— Ticker Wire (@Tickerwire) July 3, 2025
US jobs report, the details
Around half the 147,000 new jobs created last month were in the US public sector, specifically education.
Today’s jobs report shows that government employment rose by 73,000 in June, adding:
Employment in state government increased by 47,000, largely in education (+40,000). Employment in local government education continued to trend up (+23,000).
But, there were 7,000 job cuts in June in the federal government – where employment is down by 69,000 since reaching a recent peak in January. (Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey, the BLS points out, which makes it harder to see the impact of DOGE job cuts).
Health care added 39,000 jobs in June, including 16,000 in hospitals and 14,000 in nursing and residential care facilities
Social assistance employment rose by 19,000.
However, there was little change in employment in other major industries.
US economy beats forecasts with 147,000 new jobs in June
Newsflash: The US economy added more new jobs than expected last month, a sign that economic growth wasn’t chilled by Donald Trump’s trade wars.
The US non-farm payroll, the closely-watched measure of America’s jobs market, rose by 147,000 in June, better than the 110,000 new hires expected.
The unemployment rate has dipped to 4.1%, down from 4.2% recorded last month – and lower than the 4.3% which economist had forecast.
The U.S. Bureau of Labor Statistics reported that “Job gains occurred in state government and health care. Federal government continued to lose jobs.”
In another encouraging signs, the two previous month’s jobs report have been revised higher too.
April was revised up by 11,000, from +147,000 to +158,000, and the change for May was revised up by 5,000, from +139,000 to +144,000.
Economists predict that today’s US jobs report, due in about 30 minutes, will show that America’s labour market slowed in June.
The consensus forecast is that the US non-farm payroll rose by 110,000 jobs last month, which would be a slowdown on the 139,000 new hires recorded in May.
The US unemployment rate is forecast to rise to 4.3%, from 4.2%.
World stock markets at record highs
Today’s rally in London has helped to push global stock markets to record levels.
MSCI’s main index of global shares has touched a new record high today, as investors await the latest US jobs report in just under an hour’s time.
News that the US and Vietnam have reached a trade deal has lifted the mood in the markets – under it, Americans will pay a 20% tariffs on imports from Vietnam, while the US will get tariff-free access into Vietnam’s markets.
The UK stock market is higher today too.
The FTSE 100 index of blue-chip shares is up 33 points, or 0.4%, at 8807 points.
The smaller FTSE 250 index of medium-sized companies has gained 0.6%.
Joshua Mahony, chief market analyst at Rostro, explains:
European markets are on the rise today with the FTSE 100 attempting to regain lost ground as a sharp rise in borrowing costs raised fear of another Truss/Kwarteng moment yesterday.
The watered-down version of the Labour welfare reforms does mean we are staring at a fiscal black hole which like means greater tax hikes, with the pop in UK bond yields highlighting the fear of financial instability in the UK. With Reeves known to follow the premise that all day-to-day spending must be covered by tax revenues, the prospect of her losing her post had initially spooked markets.
However, Starmer’s efforts to calm markets appears to have paid off, with the PM pledging that she will “be the chancellor into the next election and for many years afterwards”.
FT: BlackRock and Schroders bought gilts during market slump
Today’s recovery in UK bond prices will be profitable for investors who bought gilts yesterday, after prices tumbled.
According to the Financial Times, those winners include BlackRock and Schroders, who both bought UK debt during Wednesday’s sell-off. Both firms bet that the uncertainty over Rachel Reeves’ future would not trigger a deeper rout in UK government debt.
Simon Blundell, co-head of BlackRock’s European active fixed-income team, has explained:
“We are overweight the gilt market, we did add to that yesterday afternoon.”
Because bond yield rise when prices fall, gilts bought yesterday will provide a higher rate of return than if you were to buy them today (as prices have recovered).
A UK interest rate cut next month is looking slightly more likely, City predictions suggest.
An August rate cut is now seen as an 81% probability, according to the money markets this morning. That’s up from around 75% earlier this week.
Reeves reaffirms importance of fiscal rules
Rachel Reeves has just spoken at an event to launch the UK’s new 10-year health plan.
My colleague Andrew Sparrow reports that Reeves is smiling a lot as she says the plan will get the NHS “back on its feet”.
And she says she has only been able to invest in public services by sticking to her fiscal rules.
She does not refer to what happened in the Commons yesterday at PMQs.
NEW: A beaming Rachel Reeves speaks at launch of govt’s 10-year plan for NHS, in attempt to draw a line under speculation over her future.
Chancellor also takes opportunity to remind everybody of her fiscal rules: “Our commitment to our fiscal rules means that we can boost…
— Pippa Crerar (@PippaCrerar) July 3, 2025
Health secretary Wes Streeting praised Reeves at the event too, saying she has put an extra £29bn into the NHS.
Streeting said:
It is thanks to her leadership that we’ve seen interest rates in our country fall four times. It’s thanks to her leadership that we see wages finally rising faster than the cost of living. And it’s thanks to her leadership we have the fastest growing economy in the G7.
Andy’s Politics Live blog has all the action:
Morgan Stanley predicts tax hikes in the autumn
The UK government is more likely to raise taxes in the autumn budget than attempt spending cuts, predicts Morgan Stanley economist Bruna Skarica.
Skarica told clients this morning that the UK could potentially face a £30bn miss versus their fiscal framework in the autumn – £1bn from u-turning on winter fuel payments, £5bn from the delay to welfare reform, plus a potential £20bn hit if the Office for Budget Responsibility lowers its growth forecasts.
Skarica points out that “to govern is to choose”, and suggests three options:
-
Find alternative spending cuts. This, we think, would be challenging. Indeed, in our mid-year outlook we noted that our “our main concern going into the autumn is…that the existing departmental spending plans look very tight…It seems almost inevitable that current spending will be topped up”;
-
Raise taxes. Hiking income, corporation or value-added taxes would breach Labour’s manifesto commitments, but we estimate it would be challenging to amass revenues of more than £10bn from increasing other levies and surcharges.
In our mid-year outlook, we noted that the effective rate of income tax in the UK looks relatively low for median earners, implying that reversing the recently cut employee NICs could be one option for the Treasury to consider.
-
Fiscal rules could be altered. The rising risks of this option, we think, is what drove the adverse market action [on Wednesday]. UK fiscal rules are self-imposed and can be adjusted by the Treasury.
Elsewhere in the economy, demand for mortgages appears to be weakening.
British lenders expect demand for mortgages will fall over the coming three months, according to new data from the Bank of England.
The BoE’s quarterly Credit Conditions Survey shows that more lenders expect a drop in secured lending in the next three months.
Continued uncertainty dries up future lending demand over the summer holidays.
In the @bankofengland ’s Credit and Conditions survey demand for secured lending for house purchases and remortgaging was reported to have increased in Q2, and was expected to further growth in the… pic.twitter.com/Zmlk95B5PT— Emma Fildes (@emmafildes) July 3, 2025
Uk 10-year bond yields have also recovered quite a lot of yesterday’s jump, as this post from Mohamed El-Erian (who we heard from earlier) shows:
Further to yesterday’s post, UK gilt yields have retraced a significant portion of yesterday’s sharp widening. This follows, and is in reaction to the Prime Minister’s strong public support for Rachel Reeves in last night’s interview with the BBC’s Nick Robinson.#economy #bonds… pic.twitter.com/F1zVIglepA
— Mohamed A. El-Erian (@elerianm) July 3, 2025
Prime minister Keir Starmer has “brought a sense of calm to markets” by backing Rachel Reeves, says Dan Coatsworth, investment analyst at AJ Bell.
Coatsworth explains:
“Starmer declaring his support for the chancellor has led to gilt yields pulling back and sterling rebounding after yesterday’s slump against the dollar. The initial sell-off in gilts and the pound was the market’s way of saying it was losing faith in the economic outlook and political stability.
“It was an electric shock for investors but today’s rebound suggests that crisis has been averted, at least for now. UK economically sensitive assets were in relief mode, including a rally in housebuilders and banks.
UK service sector posts strongest growth in 10 months
Newsflash: Britain’s services sector has grown at its fastest pace in 10 months, in a boost to the UK government.
Data firm S&P Global has reported that UK service providers have reported “a sustained expansion of business activity in June”.
Activity grew at the fastest rate since August 2024, lifted by growing improvement in order books, according to the latest poll of purchasing managers at UK services firms.
This lifted S&P Global’s UK Services PMI to 52.8 in June, up from 50.9 in May and the highest for 10 months. Any reading over 50 shows a rise in activity.
Companies attributed the pick-up to “generally improving business and consumer spending”, despite “subdued UK economic conditions, the impact of US tariffs and adverse geopolitical factors”, the report says.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
“June data highlighted a modest rebound in UK service sector growth, fuelled by a turnaround in domestic business and consumer spending after a soft patch during the spring. Business activity expansion was slightly stronger than the earlier ‘flash’ estimate for June and the fastest seen since August 2024.
While total new work picked up in June, shrinking export sales were a constraint on service sector growth. Survey respondents cited headwinds from US tariffs and geopolitical tensions, which resulted in subdued demand conditions across global markets.
UK bonds claw back losses after PMQs
Britain’s 30-year bonds have almost recovered to their levels before yesterday’s sharp sell-off.
The yield, or interest rate, on 30-year debt has now dropped by almost 10 basis points (0.1 percentage point) to 5.31%, down from 5.4% last night.
At noon yesterday, they were trading at 5.29%, before worries over Rachel Reeves’s future sparked a bond selloff, pushing up yields (which rise when price fall).
