(Bloomberg) — UK assets have suffered a horrendous start to the new year as investors fret about the country’s finances, reigniting memories of a market crisis in 2022 that brought down former Prime Minister Liz Truss.
Most Read from Bloomberg
Investors are still nervous and want to see Chancellor Rachel Reeves taking some action to make the country’s debt burden more sustainable. Here are charts showing the scale of this week’s moves across bonds, equities and currencies.
Bond Yields
The UK’s bonds have been under pressure after Reeves’ budget in October heralded increased borrowing, tax hikes and greater spending that could fuel inflation. A steady surge in yields since then was exacerbated by traders scaling back bets on interest-rate cuts. The move accelerated into a major selloff this week as debt auctions brought the scale of planned bond sales into focus. A drop in bidding at the first of these fueled the rout.
Borrowing Costs
The spike in government borrowing costs is enough to wipe out Reeves’ headroom against her main fiscal rule in the October budget — and threatens to tear up her pledge to fix public services and revive growth. At the risk of losing her carefully crafted reputation as a responsible, pro-business Chancellor, Reeves is now feeling the pressure to announce new spending cuts or tax rises to calm markets.
Rate Bets
The bond moves have been underpinned by traders scaling back bets on how much the Bank of England will cut interest rates. Expectations before the October budget were for six more reductions by the end of this year, but policymakers delivered just one subsequent move in November and money-market traders now see only two more in 2025. Donald Trump’s US election success has also raised the specter of tariffs, which are viewed as inflationary, so these wagers could drop further.
FX Sentiment
The higher bond yields on offer would normally draw investors into a currency, but instead the pound reacted by slumping — a worrying signal for many as it implied a more widespread dumping of the country’s assets. Sterling then continued to slide to the lowest since November 2023. While the current situation has drawn comparisons with the Truss era, sterling is well above the record low $1.0350 hit then.
Hedging Costs
Still, traders are betting on further weakness, with sentiment in the options market the most negative in over two years. The greater swings are also making it more expensive for investors to hedge against losses in the value of sterling. Over the next week, expectations of volatility have surged to nearly match levels seen in the pivotal US November election. Over the next month and year, they are the highest since 2023.
Story continues
Read mote: Pound Trading Frenzy Shows Option Market’s Fear of Truss Redux
Domestic Stocks
Finally, all the turmoil has made it a tough time for the UK’s stocks. The midcap benchmark FTSE 250 index has suffered its worst start to the year since 2016. A Goldman Sachs Group Inc. basket of UK domestic stocks has lost around 4% this week. Retailers are particularly feeling the heat — following sales updates from the likes of Tesco Plc and Marks & Spencer Group Plc that confirmed the outlook is uncertain at best, and could even be grim. UK homebuilders have also taken a hit given the expectations for fewer cuts to borrowing costs.
–With assistance from Michael Msika, Vassilis Karamanis and Irina Anghel.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.