Markets deliver Truss-era warning to Starmer and Reeves as fiscal credibility unravels

Britain’s bond markets are delivering a stark and immediate warning to Prime Minister Keir Starmer and Chancellor Rachel Reeves, drawing uncomfortable comparisons with the turmoil of the Liz Truss era.

The UK government’s abrupt welfare policy reversal has triggered a sell-off in gilts, sending borrowing costs to their highest levels since the global financial crisis and reigniting fears over the UK’s fiscal stability.

“The echoes of Truss in 2022 are unmistakable,” says Nigel Green, CEO of deVere Group. “Back then, it was a reckless mini-budget that shattered market confidence. This time, it’s a government lurching from one policy retreat to another, raising serious doubts about fiscal control and political authority.”

The government’s decision to backtrack on a planned £5 billion package of welfare reforms—after internal Labour Party dissent—has left a £6 billion shortfall in the public finances.

The shelving of key measures, including cuts to the Personal Independence Payment (PIP), has left investors questioning whether this administration can deliver the tough decisions needed to keep the UK’s fiscal trajectory on course.

“Bond markets move on trust, consistency, and credibility,” says the deVere CEO.

“The sudden abandonment of major spending plans—without a clear alternative—signals weakness. Investors are now re-pricing UK risk accordingly.”

Ten-year gilt yields have surged to around 4.6%, marking their highest level since 2008. The spread between UK government bonds and German Bunds has blown out to over 200 basis points, a level rarely seen in modern times and a clear signal that international investors are demanding a premium to hold UK debt.

“The rise in gilt yields isn’t simply about global rate expectations or inflation concerns,” says Nigel Green.

“It’s a direct reflection of waning confidence in the government’s ability to stick to a coherent fiscal strategy. Markets remember the volatility triggered by Truss, and they’re seeing familiar warning signs again.”

Investors are particularly concerned that the Starmer government’s early vulnerability to backbench pressure could create a pattern of fiscal indecision.

With inflation still running at 3.5% and the debt-to-GDP ratio close to 100%, Britain has little room to absorb further fiscal slippage without spooking markets even further.

“The fear is that this U-turn won’t be the last,” notes the chief executive.

“Once a government shows that it will reverse course under political pressure, every future policy announcement comes under immediate scrutiny. Investors start to question not just the numbers—but the government’s capacity to deliver.”

The shift in market sentiment comes at a dangerous time for the UK economy. Growth remains fragile, consumer spending is under pressure, and the Bank of England faces difficult decisions on the future path of interest rates. Rising gilt yields will feed directly into higher borrowing costs across the economy, increasing the risks of a broader slowdown.

“Higher yields mean more expensive mortgages, tighter credit conditions for businesses, and a heavier interest bill for the government itself,” explains Nigel Green.

“It becomes a self-reinforcing cycle unless credibility is quickly restored.”

Some investors may look at current gilt levels and see tactical buying opportunities, especially given how far yields have climbed in a short period. But most institutional players remain cautious, focusing on political risk as much as economic fundamentals.

“The market’s view is that promises are no longer enough,” says Nigel Green. “Investors want to see concrete fiscal decisions backed by political resolve. Without that, the sell-off in gilts could intensify.”

For now, the pressure is firmly on Starmer and Reeves to draw a line under the uncertainty and rebuild trust with markets. But after such an early and public loss of fiscal control, that task looks significantly harder.

“The government needs to act fast and decisively,” concludes the deVere CEO.

“The Truss crisis showed how quickly bond markets can turn against a government that loses its grip on fiscal management. The UK cannot afford to replay that scenario.”