Will bond market turmoil lead to spending cuts, higher taxes and austerity? Here's what you need to know

Something or other is happening with bonds. The pound is tanking and people are talking about Liz Truss again. Clearly none of this is good news – but what exactly does it all mean?

We’ve broken down what’s going on, and whether it might impact public services and your pocket.

What’s happening with bonds?

The government’s cost of borrowing has shot up, thanks to a global trend of investors selling bonds. To borrow money, the UK government issues debt as bonds – essentially borrowing money from those in the stock markets. As a result, interest payments on government debt have increased, while the government is also having to re-finance older debt at more expensive rates.

Interest rates on 10-year government bonds are higher than during the panic after Liz Truss’ mini-budget, while the pound is at a 14-month low against the dollar.

“Bond market vigilants are back because interest rates now exceed inflation, because there are worries about US bond yields, and because UK growth performance has been disappointing,” says Morten Ravn, professor of economics at University College London.

Some of this is due to global trends – including fears about Donald Trump imposing tariffs. But some is also specific to the UK, with sluggish growth in the UK raising “stagflation” fears.

This in itself isn’t great, but becomes especially difficult given self-imposed rules Rachel Reeves has given herself. The chancellor’s fiscal rules forbid borrowing for day-to-day spending, which means the government won’t borrow to service its debt.

After her October budget, the Office for Budget Responsibility said Reeves had £9.9bn of headroom to meet her rules. The higher cost of borrowing threatens to gobble this up.

“Rachel Reeves’ fiscal strategy appears to be nothing more than wishful thinking dressed up as policy,” said Nigel Green, CEO of deVere Group, an independent financial consultancy.

“Reeves’ fragile £9.9bn fiscal buffer could be obliterated well before her official fiscal update on 26 March. The chancellor’s inability to reassure markets is fanning fears of an economic implosion, with austerity looming as the only option to restore credibility – a brutal throwback to 1976.”

This presents her with options, says Ravn: Stalling future spending plans, increasing taxes or deviating from the fiscal rules.

Her deputy, Darren Jones, has told parliament that the fiscal rules are non-negotiable. “There should be no doubt about the government’s commitment to economic stability and sound public finances, this is why meeting the fiscal rules is non-negotiable,” Jones told MPs.

How will this impact you?

With the fiscal rules seemingly non-negotiable, the spectre of spending cuts is looming.

“UK households will be impacted through the fiscal policy choices and through the interest rate decisions of the Bank of England,” says Ravn. “The Bank of England has signalled that it is reluctant to cut interest rates fast because inflation now is coming down slower. Thus, it is likely that fiscal policy will need to be tightened.”

Yet the whiff of austerity puts Starmer’s government in a tough position. In the run-up to the election, he told Big Issue there would be no return to austerity under his watch, while much of his policy agenda rests on improving public services.

Ravn adds: “Higher taxes will mean tighter household finances and fewer jobs. Less fiscal spending will worsen public services and reduce job opportunities. Both will work against growth but there might not be much room to do much else for Labour.”

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