The market’s attention is now turning to whether Chancellor Rachel Reeves is really as safe as Prime Minister Keir Starmer has suggested, says Kallum Pickering, chief economist at UK investment bank Peel Hunt,Pickering suggests there are three possible outcomes, writing:Reeves stays because Starmer realises that markets see her as less bad than the alternatives and because, put plainly, history shows that Prime Ministers who sack their Chancellors rarely last long either;Reeves is replaced by a presumed safe pair of hands (such as Pat McFadden) once markets have settled – but to restore credibility her replacement will need to stare down and win a budget fight with the far-left fringe of the Labour Party, which now appears to be the tail that wags the dog on fiscal policy; orStarmer may brief against Reeves to suggest she is the reason Labour promised not to raise the big three taxes (income tax, VAT and employee NI) before forcing her to raise one of them at the budget to get the finances on track, then sack her and let her to take the blame for the fiscal failures during the first 18 months in office,Pickering also warns that the next few days and weeks may be choppy in the run-up to 9 July, when the pause on Donald Trump’s ‘Liberation Day’ tariffs is due to end,Following on from my initial reaction yesterday, a few more thoughts on the situation in UK bond markets:1,For all the talk about big market moves, we must not lose sight of the fact that GBP/USD is up 9% year-to-date (see chart) and a 4.

6% handle on a 10-year gilt is pretty… https://t.co/FesrBjcmGu pic.twitter.com/KXW97yyz91The drop in yields on shorter-term UK bonds will be a relief to households looking to take out a mortgage (or remortgage).As the BBC’s Faisal Islam points out, those products are priced off the cost of UK government borrowing:Gilt yields tumbling back down to where they were before PMQs after PM’s interview with @bbcnickrobinson giving full support to Chancellor.

Down 9-10 basis points (ie 0.1% points) across the board and so eg 5 year back below 4% (important for fixed mortgages)…Rachel Reeves has the backing of the bond market, argues Kathleen Brooks, research director at XTB.Brooks says yesterday bond market sell-off reflected concerns about what may come in the autumn budget; and is also a reminder to “the hard left of the Labour party that the UK economy cannot afford its benefits bill”.Brooks writes:After the watered down welfare reform bill, the focus was on the need to raise taxes and to potentially issue more borrowing to cover the cost of Labour’s plans.However, the bond market revolt suggests that these two options are not viable when national debt is so high and the economy is so weak.

The bond market is telling the Chancellor to get on with the job of reducing unsustainable levels of public sector spending, but will she listen?The pound is pushing higher too!Sterling has now gained a third of a cent against the US dollar, up to $1.366.That means it has recovered roughly a third of yesterday’s tumble.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 by over 3% 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.The jump in UK borrowing costs yesterday will have added to Rachel Reeves’s fiscal problems, unless it reverses.Mohamed El-Erian, chief economic advisor to insurance giant Allianz, has calculated that Wednesday’s rise in bond yields would add £1.8bn to government spending each year, “if it sticks”.

He told Radio 4’s Today programme that it’s “very hard” to take a risk premium out of markets, explaining:The minute you put a risk premium in the marketplace, it’s very hard to take out.I suspect that we will see some moderation, but we will not go back to where we were 24 hours ago.El-Erian says investors have been reminded that the UK’s fiscal problem is “deep”; without growth, we face a “vicious cycle where every action you try to take is either economically problematic or politically problematic,” he adds.He then warns that Reeves’s fiscal headroom of about £10bn (the margin before she breaks her fiscal rules) is “essentially gone”.That means she must find at least £10bn of measures in autumn’s budget, and that bill will go up if growth slows or borrowing costs rise further.

And that money may have to come from taxes.El-Erian explains:So the area left are the two taxes that the Labour government ruled out in the election, income tax and VAT.They are your major sources of tax revenue.No one likes them, but in a world like this, they will become better than the alternatives.After a tough day yesterday, the pound is calmer in early trading.

Sterling is marginally higher (+0.08%) against the US dollar today, at $1.3646, having dropped by a cent yesterday.The calm follows backing for Rachel Reeves from Keir Starmer.He told the BBC that the Chancellor has done a “fantastic job”, adding:“She and I work together, we think together.

In the past, there have been examples – I won’t give any specific – of chancellors and prime ministers who weren’t in lockstep.We’re in lockstep.”That may reassure investsors worried that Reeves could be replaced, and that a new chancellor would be less enthusiastic about controlling borrowing.Simon French, chief economist at investment bank Panmure Liberum, argues that “almost all other Chancellor options from within the parliamentary Labour Party” are less market friendly options.French told clients:Recent weeks have shown that large parts of the parliamentary Labour Party in the UK do not have the stomach for the tough fiscal choices required in a normalised interest rate environment, amidst sluggish productivity growth, with the tax burden at an eight-decade high, and with a deteriorating demographic profile.

The lack of a working majority for its economic plans leaves the Labour government with an intractable problem - its credibility with financial markets hinges on adherence to a set of fiscal rules that are incompatible with its manifesto tax commitments, and the plans outlined at the recent Spending Review,Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy,All eyes are on UK bonds, and the pound, after both fell sharply yesterday amid speculation over the future of chancellor Rachel Reeves,Wednesday was a turbulent day for the UK bond market; prices of British government debt fell heavily as investors were gripped by concerns of change at the top of the Treasury,The selloff highlights anxiety that the government’s u-turn on welfare reform has blown a multi-billion pound black hole in the chancellor’s budget plans.

Bonds slumped, driving up borrowing costs, after Keir Starmer failed initially to give his full backing to Reeves at prime minister’s questions, with a tearful chancellor alongside him.The pound also suffered, falling by a cent against the US dollar as it slid from $1.3745 to $1.3636, making it the worst-performing major currency in the world.Starmer has now defended Reeves, saying her tears were due to a “personal matter” and insisted she will remain chancellor “for a very long time to come”.

The bond selloff may actually have reinforced Reeves’s position as chancellor, highlighting that the markets would not welcome a replacement who might be less devoted to fiscal discipline.Andrew Wishart, economist at Berenberg Bank argues that “Investors probably saved the Chancellor”, saying:By selling sterling assets investors have probably kept UK chancellor Rachel Reeves in her post.Financial markets initially reacted little to the government failing to get approval for savings in the disability benefit budget from its own parliamentary faction.But when the Prime Minister failed to say that a visibly upset Reeves would remain in her job during Prime Ministers Questions, UK assets sold off.The Chancellor has become synonymous with a fiscal rule of covering day-to-day spending with tax revenue.

https://t.co/UC9QmY0Lt1 UK selloff signals that fiscal rules are not just for show #reeves #fiscal #gilts #macro #ukeconomy #ukmacro pic.twitter.com/auvfYrWogDThat fiscal rule may dictate tax rises in the autumn budget, as spending cuts could be too much of a political headache, judging by the massive rebellion against the welfare bill that has created a £5bn hole in the chancellor’s plans.America’s economy may take the market spotlight off Reeves this afternoon, when the latest US jobs report is released.

It will show whether trade war tensions have hit hiring at US businesses.9.30am BST: UK service sector PMI for June10am BST: OECD Economic Survey of the European Union and Euro Area1.30pm BST: US non farm payrolls employment report for June