Sale of index-linked debt sees record demand, while UK bond yields are only marginally higher on the back of ‘political chaos’
Britain has not lost the support of the bond markets, despite the turmoil in Westminster and uncertainty over this month’s budget.
A new auction of inflation-linked UK debt, which matures in 2038, has attracted record demand from investors keen to buy the bonds.
According to Reuters, demand for the UK debt broke the previous record.
They say:
Orders for the 1.75% September 2038 inflation-linked bond topped £69bn, a bookrunner said, beating a previous record of £67.5bn for an index-linked gilt sold via syndication in March.
The bond was priced to give a yield 10.5 basis points above that of the 1.125% index-linked gilt due in 2037.
A large number of orders is usually good news for a bond issuer, who will choose the most attractively-priced offers.
Index-linked bonds protect investors from the rising cost of living, because both the coupon payments (interest on the debt) and the principal payments (the amount actually borrowed, which is repaid when the bond matures) rises or falls in line with inflation.
This strong demand is a sign that the Westminster furore over a possible leadership challenge to Keir Starmer, now denied by health secretary Wes Streeting, has not prompted bond investors to shun UK debt.
As flagged earlier, the price of UK government bonds has dropped today, pushing up the implied cost of borrowing.
But while UK gilts are lagging behind other government debt today, the moves are modest.
Could that be a sign that the bond markets are sanguine about the possibility of defenestation on Downing Street?
Kathleen Brooks, research director at XTB, says:
UK bond yields are marginally higher on the back of this political chaos, the 10-year yield is higher by 2.7bps, and the 2-year yield is higher by 1.7bps. This is a small move and does not compare with the bond market tantrum in the summer when rumours circled that Rachel Reeves would be sacked. The bond yield spike back in July helped Reeves keep her job, the question now is, will a mild reaction to the prospect of Kier Starmer being overthrown as PM embolden his potential successors?
Reeves and Starmer’s swing to the left on public spending and tax rises has been well absorbed by the bond market so far, since a tax increase could build a structural budget surplus for the UK, even if there is a hit to growth. Ironically, this could make Reeves’ and Starmer’s jobs less secure, as the political chaos threatens the UK once again.
Time to recap…..
An offering of UK inflation-linked bonds has attracted record orders, showing there is still appetite for British government debt.
Investors placed more than £69bn of bids in an auction of UK bonds maturing in 2037, which beats the previous record for an auction of index-linked gilts.
The yield, or interest rate, on UK government debt has risen slightly today, after reports that Keir Starmer’s allies fear a leadership challenge. But the rise is modest – with the yield on 10-year bonds up a modest 2 basis points today.
The pound has weakened a little, losing half a cent against the US dollar to $1.3097.
Britain’s FTSE 100 share index has hit a new record high today, with the FTSE 100 nudging 9930 points, before closing at 9,911 points.
The US’s Dow Jones Industrial Average has hit a record high.
We will have to wait a little longer for the FTSE 100 to hit the 10,000-point mark.
The UK’s blue-chip share index has just ended the day at a new closing high, of 9,911 points. Earlier it hit a record intraday high of 9930 points….
Energy producer SSE led the way, finishing 16.8% higher after announcing a £33bn investment programme.
Chancellor of the Exchequer Rachel Reeves has welcomed the plan, saying:
“This landmark investment by SSE is a vote of confidence in the UK’s energy future. It means greater energy security, lower bills, and a boost for the economy to put more money in the pockets of working people.”
The head of the UK’s debt management office has said she was pleased that today’s debt auction attracted such strong demand.
DMO chief executive Jessica Pulay said:
“This transaction, which represents the second offering of this bond following its launch in June 2025, was warmly received by the market.”
Artificial intelligence firm Anthropic has announced it will spend $50bn constructing its US artificial intelligence infrastructure.
The plan will begin with custom data centers in Texas and New York. Additional sites are expected to follow, with the first locations going live in 2026. The project is expected to create 800 permanent jobs and more than 2,000 construction roles.
The UK’s FTSE 100 index is having an afternoon rally, and just hit a new record high of 9930 points.
The share index is defying expectations that mounting fiscal headwinds and a cautious November Budget would dampen investor enthusiasm, says Axel Rudolph, senior technical analyst at IG, adding:
This surprising strength comes despite widespread unease over the UK government’s next round of fiscal tightening, including potential tax rises designed to close the budget gap.
Rather than faltering under these pressures, the index has surged, supported by a confluence of global and domestic forces and Bank of England (BoE) rate cut expectations following this week’s dismal employment data.
Unemployment rising to a 4-year high of 5% has reinforced expectations for monetary policy easing, making the UK’s blue-chip benchmark an unlikely outperformer.
Wall Street has opened higher, with optimism over the imminent reopening of the US government driving stocks to record levels.
The Dow Jones industrial average has hit a record high, gaining 87.8 points, or 0.18%, at the open to 48,015.79.
The broader S&P 500 index is up 0.3% and the tech-focused Nasdaq is 0.4% higher.
Chipmaker AMD is leading the rally, up over 8%, which should please CEO Lisa Su – who just rang the Nasdaq opening bell.
US Treasury Secretary Scott Bessent has revealed that the Trump administration is planning “substantial announcements” to bring down imported food prices shortly.
With pressure mounting about the US affordability crisis, Bessent told Fox News:
It’s tough to do a lot of specific things, but i can tell you you’re going to see some substantial announcements over the next couple of days in terms of things we don’t grow here in the United States.
Coffee being one of them, bananas, other fruits, things like that.
That will bring the prices down very quickly.
Bessent also said the Trump White House had inherited one of the worst affordability crises in America’s history – neglecting to mention that the president’s tariffs have pushed up the cost of imported goods from other countries.
He also argues that Trump will deliver real wages increases, by bringing back high-paying manufacturing jobs.
Over in Berlin, chancellor Friedrich Merz’s advisers have cut their forecast for growth next year to below 1%.
And despite Merz’s pledge to revive the economy, they only expect modest growth this year.
The German Council of Economic Experts lowered their forecast for growth in 2026 to 0.9% from 1.0% in their earlier May report, arguing that a spending boost rolled out by Merz’s government will only have a small impact on growth.
The council’s chair, Monika Schnitzer, said:
“In light of current challenges, Germany must develop new perspectives for growth and security policy.
“The opportunities arising from the special fund for infrastructure and climate neutrality must not be squandered.”
Shares in UK housebuilders have dropped today after Taylor Wimpey reported a pre-budget slowdown in sales (see earlier post).
Taylor Wimpey is one of the top fallers on the FTSE 250 index of medium-sized company shares, down 3.4% today. Berkeley Group are down 2%, and property portfolio Rightmove has lost 1.6%.
AJ Bell investment director Russ Mould says:
“The Budget must surely now be rivalling the Boogeyman as the thing beginning with B which engenders the most fear. Housebuilder Taylor Wimpey is the latest company to bemoan the impact the run up to this fiscal event is having on trading.
A double-digit drop in sales rates in the key autumn period is worse than that reported by rival Barratt Redrow recently, which may raise some questions among investors.
“House prices are proving reasonably resilient, supported by strong underlying supply and demand dynamics, but build costs are continuing to creep up which could put pressure on margins.
“For now, Taylor Wimpey is sticking with its full-year guidance for completions and operating profit.
The US government shutdown doesn’t seem to have dented demand for mortgages.
Mortgage applications to purchase a home rose 6% last week to their strongest pace since September, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 31% higher than the same week one year ago, new MBA data shows.
Although the FTSE 100 has now dippped back from its latest record high, European stock markets have reached new peaks.
The pan-European Stoxx 600 index has gained 0.6% today, led by Germany’s DAX (+1.1%) and France’s CAC 40 (+1.15%).
Financial stocks are leading the rally, as investors welcome a potential end to the historic US government shutdown.
A rise in bond yields and/or sterling’s fall should not come as a surprise following the latest “political” instability, Professor Costas Milas of the University of Liverpool’s Management School tells us:
Rachel Reeves often talks about the importance of “low” bond yields but yields rise or fall minute by minute. The hard evidence of how unimpressed investors have become is elsewhere. The latest OECD data on Foreign Direct Investment (FDI) inflows to the UK are concerning (Table 1 here).
FDI inflows do matter because they represent a measure of long-term commitment of international investors in our economy.
Since Labour came into power, FDI inflows have been extremely volatile. They turned extremely negative (-$25,314mn) in late 2024 before recovering their losses in early 2025 and then losing some of their steam again in mid-2025 (+$7,255 mn). These are concerning times for Reeves (and Starmer).
Britain has not lost the support of the bond markets, despite the turmoil in Westminster and uncertainty over this month’s budget.
A new auction of inflation-linked UK debt, which matures in 2038, has attracted record demand from investors keen to buy the bonds.
According to Reuters, demand for the UK debt broke the previous record.
They say:
Orders for the 1.75% September 2038 inflation-linked bond topped £69bn, a bookrunner said, beating a previous record of £67.5bn for an index-linked gilt sold via syndication in March.
The bond was priced to give a yield 10.5 basis points above that of the 1.125% index-linked gilt due in 2037.
A large number of orders is usually good news for a bond issuer, who will choose the most attractively-priced offers.
Index-linked bonds protect investors from the rising cost of living, because both the coupon payments (interest on the debt) and the principal payments (the amount actually borrowed, which is repaid when the bond matures) rises or falls in line with inflation.
This strong demand is a sign that the Westminster furore over a possible leadership challenge to Keir Starmer, now denied by health secretary Wes Streeting, has not prompted bond investors to shun UK debt.
As flagged earlier, the price of UK government bonds has dropped today, pushing up the implied cost of borrowing.
But while UK gilts are lagging behind other government debt today, the moves are modest.
Could that be a sign that the bond markets are sanguine about the possibility of defenestation on Downing Street?
Kathleen Brooks, research director at XTB, says:
UK bond yields are marginally higher on the back of this political chaos, the 10-year yield is higher by 2.7bps, and the 2-year yield is higher by 1.7bps. This is a small move and does not compare with the bond market tantrum in the summer when rumours circled that Rachel Reeves would be sacked. The bond yield spike back in July helped Reeves keep her job, the question now is, will a mild reaction to the prospect of Kier Starmer being overthrown as PM embolden his potential successors?
Reeves and Starmer’s swing to the left on public spending and tax rises has been well absorbed by the bond market so far, since a tax increase could build a structural budget surplus for the UK, even if there is a hit to growth. Ironically, this could make Reeves’ and Starmer’s jobs less secure, as the political chaos threatens the UK once again.