London (Parliament Politics Magazine) – City investors warn Chancellor Rachel Reeves could face a second budget if bond yields spike, amid concerns over Labour’s financial planning.
As reported by The Guardian, a City investor warns bond markets could push Rachel Reeves into a second budget if her plans disappoint investors.
What did investors say about UK bond risks after the Budget?
David Zahn, European fixed income chief at Franklin Templeton, warned that a disappointing budget from the chancellor on 26 November could trigger a sharp rise in UK government bond yields.
He said in that case,
“it forces her hand to do a secondary budget.”
Mr Zahn explained,
“It depends how the bond market reacts. If the bond market reacts very badly … the government will have to react if bond yields start to go up too much.”
He warned that British government debt could become “unsustainable” and face a dangerous spiral if 10- or 30-year bond yields climbed that high.
He fears that Labour’s struggle to enforce spending cuts could leave bond investors wary, preventing yields from falling and keeping borrowing costs high.
Mr Zahn said,
“If [Reeves is] not going to tackle any of the big taxes, I don’t see what she can do that the market will go ‘fantastic, you fixed it’, because she’s not doing any spending cuts.”
He argued that implementing spending cuts and “real tax increases” could lower gilt yields and support government funding, adding,
“If she had done income tax, I think markets would have taken that very well. It would have said, OK, we have somebody who’s serious about getting the budget balanced.”
Mr Zahn suggested the budget should provide “headroom north of £20bn” and warned that any tax increases could be repeated next year, saying,
“I do think this is going to be repeated next year, I don’t think this is a one-off.”
He predicted,
“She probably won’t be back next year, but somebody will be back in that seat. They’ll be back next year.”
James Smith, ING’s economist for developed markets, warned that political factors could trigger a spike in bond yields after the budget.
He said,
“The ruling Labour party’s poll ratings have fallen through 2025, and prime minister Keir Starmer is coming under mounting pressure within his party, not helped by recent communications missteps.”
Mr Smith added,
“Were a leadership challenge to become a more imminent possibility – which at the moment, it’s not – then markets may quickly assume that a new PM would mean a new chancellor. And a new chancellor, perhaps more left-leaning … would be seen as more likely to change the fiscal rules and increase borrowing.”
Michael Browne, global investment strategist at Franklin Templeton, said the 2022 mini-budget from former Prime Minister Liz Truss continues to affect both sides of the UK political divide.
He added,
“The markets are not forgetting that either. It can see the opportunity set in the UK. Get it right, and this is really interesting. This is exciting, both from a bond and an equity point of view. But at this point in time, what’s the evidence that suggests we’ll do anything more than muddle through? And muddling through comes with risks.”
City investors are optimistic that the budget will provide fiscal flexibility, helping the government meet its debt reduction target.
The chancellor had previously allowed only £10bn in fiscal headroom, which may have been consumed by a downgraded productivity forecast. The limited buffer left the Treasury exposed to market and economic shocks.
Ms Reeves is likely to freeze income tax thresholds, which ING estimates would raise £10bn a year. Reports also suggest she may introduce a range of smaller taxes.
What did Rachel Reeves Say About Tax and Spending Plans in the Budget?
Rachel Reeves confirmed her plans to consider both tax increases and spending cuts, saying,
“Of course, we’re looking at tax and spending as well.”
When questioned if she could prevent the economy from falling into a doom loop, she replied,
“Nobody wants that cycle to end more than I do.”
The chancellor may need to raise to £30bn in the upcoming budget to balance the books, following a U-turn on winter fuel and welfare reforms and a major productivity downgrade.
She added,
“Challenges are being thrown our way – whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade. And now this (OBR) review is looking at how productive our economy has been in the past and then projecting that forward.”
What is a bond yield?
A bond yield is the annual return an investor earns from holding a bond, expressed as a percentage of its price. It moves inversely to the bond’s price: when the price of a bond falls, its yield rises, and vice versa.
The UK 10-year government bond (also known as a gilt) yield is approximately 4.53% as of November 18, 2025. This yield represents the annual return an investor can expect by holding the bond until maturity.