Blain’s Morning Porridge, July 3^rd 2025: A Chancellor’s tears display human fragility – not the end of the Gilts market.

“My riches can’t buy everything… I sit and watch as tears go by.”

Yesterday the Gilts market suffered a judder moment – but it was political theatre. The gilts market is fundamentally in good shape, well run, and a 3.5 times oversubscribed Gilts auction highlights it’s not under Bond Vigilante pressure. The UK is not about to default, beg an IMF bailout – no matter what Liz Truss apologists would like to believe.

To err is human. To cry is a sign of our humanity and frailty. Chancellor Rachel Reeves’ tears on the front bench of Parliament yesterday were those of a fellow human suffering; a lady in obvious personal distress. They will not be easily forgotten – the right-wing press will ensure that. We expect our politicians to rise above the personal – and display a stiff upper lip, especially when so much rides on how they demonstrate their sang-froid and competency.

I was doing a hit on a financial news show early y’day morning and was asked for my outlook on Cable (the sterling dollar exchange rate). I predicted it could well continue strengthen to $1.40. Oops. That was before the tears and the Gilts market juddering in shock – the benchmark yield rising some 22 basis points and sterling falling 2 cents to $1.36 following these tears on Prime Minister’s Questions (PMQs).

Even the hapless opposition leader Kemi Badenough was able use Reeves’ tears to score points against UK Premier Sir Keir Starmer. It was nasty, but politics is nasty. As Reeves quietly sobbed in the background, Starmer didn’t give the impression of much support for his beleaguered chancellor Rachel Reeves. In such a closely observed moment of political theatre if left her a marked woman…. Like when a football club refutes any suggestion it’s about to sack its manager, you pretty much know their bags are already packed.

It was dramatic, the market immediately asked; Who would replace her? Who would hold the UK to tight fiscal rules? Gilt yields soared and sterling tumbled. A number of clients called to ask if the judder in the Gilts market has the potential to escalate into the start of a global government bond crash. Two leading macro-hedge fund managers called yesterday to ask if a Gilts collapse could trigger a run on US Treasuries.

Yes is the answer, but not this time.

My gut feel is yesterday’s PMQ’s debacle will blow over quite swiftly – it’s primarily a political faux-pas. Starmer now says Reeves is here to stay. The moment did raise questions on the UK’s fiscal competency – but the situation is containable, and may even benefit Labour in the long-run.

One reason for that is the UK’s Gilt market is actually in pretty good shape – and global investors know that.

Yesterday, shortly before the tears, the UK’s Debt Management Office, which runs the gilts market, auctioned a £5 bln 3-year deal. It received £17.3 bln in orders – a record order book for a Gilt auction. That auction came after Labour’s embarrassing climb down on trying to cut welfare spending early this week. The over-subscription on Gilts highlights there is plenty of capacity to fund the UK. Global investors have confidence in Gilts because they know it’s well run by leading market professionals, responsive to what the market wants, and that the Chancellor is closely aligned with The UK Treasury and its rules – which the Tories, under Liz Truss, blithely ignored.

In the professional markets, Bond Vigilantes have few problems with the UK. They will put the £17 bln oversubscription on a single bond auction in context of the £5 bln the press claims Reeves won’t be able to finance. They know it’s all noise, huff, puff and bluster.

In contrast, the reaction to Reeves’ tears was furious in the right-leaning parts of the market commentariat. Within moments the right-wing Torygraph was publishing a series of out-there reactions claiming that Reeves’ tears were because the UK is about to default, speculating the bond market was on the verge of collapse, and Reeves’ successor was already planning a trip to Washington to beg an IMF bailout. These are all utter fabrications – but they are all over the twitter-sphere. Lies, damn lies and the Torygraph.

The UK’s right wing, quasi-religious Torygraph readers, have never got over the utter embarrassment that was failed premier Liz Truss who lasted less time than a lettuce. They are desperate to balance her incompetence by showing Chancellor Reeves in a similar light. But they are not equivalent. Lis Truss failed because she lacked any competence, and pulled unfunded spending to boost growth out of thin air. It was unsustainable – the market judged and found her wanting. That crash nearly did destroy Gilts – it took swift action by the Bank, Treasury and DMO to avoid levered gilts trades triggering a chain reaction of Gilt sales to fund margin calls.

Reeves is failing because she is sticking too closely to the OBR and Treasury rules, and has thus far failed to take advantage of opportunities to raise finance to fund national reconstruction. She is failing because her financial discipline has lost sight of what Labour needs to achieve – which is growth. After 364 days in office – little feels fixed. Her national insurance hike dented growth, and she’s allowed herself to be hobbled by tax promises. She is hated by the right, but I have a sneaking suspicion she may yet shock us to the upside – if she is given the chance to. Life, after all, is a learning experience.

It saddens me that national newspapers, and the failed Conservative Party, which I voted for (had Labour been viable in my constituency, I would voted for them), are focused on stoking political instability in the UK by bluntly lying about the bond market yesterday and this morning. Gilts are the single most important element and primal force acting upon the UK economy. That’s politics today – politicians who play with fire, will likely be burnt by it.

Love her or loathe her, but Rachel Reeves gets it in a way that Truss et al did not.

All the above does not excuse what happened yesterday. Keir Starmer needs a slap in face with a wet halibut to remind him to act like a Leader rather than an unfunny David Brent from the Office. He needs to be decisive. He needs to get his party behind squarely behind him, and discipline it. Shooting a few ringleaders pour les encourage les autres might be a good idea. The fact some Labour MPs are damning their own party much as the Tories self-combusted after 2010 is a symptom of politics in crisis. And that’s a big problem.

In terms of the wider issue – global government bond markets – the way Gilts juddered is a reminder of just how febrile political instability and burgeoning government deficits are. All it might take for a global bond crisis is one no-see-um even in government finances to start a major rockfall. I don’t think Reeves’ tears were that moment. Donald Trump’s big beautiful bill might be.

The rules of any Government’s economic success are essentially very simple: if a nation can show currency stability, the sustainability of its bond market, and political competency there will not be a problem. I call that Blain’s Theory of The Virtuous Sovereign Trinity.

How the Virtuous Sovereign Trinity works has been conclusively demonstrated many times here in the UK.

• In 1992, the UK was bounced out the European Exchange Rate Mechanism because sterling collapsed vs the pre-Euro Deutschemark causing bonds yields to head stratospheric.
• In 2023 the Liz Truss moment of wild promises of growth funded by unplanned bond issuance caused yields to shoot higher, triggering the near meltdown of the entire market due to leveraged gilt positions triggering margin calls that could only have been met by selling more gilts into a crashing market. We still call it the Trusterf*ck.

A few months ago I warned that the sudden tumble in Japan’s JGB market was the “canary in the coal mine” for global bonds. It turned out to be a mere tremblor rather than an earthquake – investors are very aware Western Capitalist Nations are highly levered in terms of debt to GDP, and notice has been served that steps have to be taken to control deficits.

I give Labour credit for trying hard to take difficult and painful spending decisions. But they need to generate growth. Chancellor Reeves has tried hard to stick to spending guidelines – to the extent some think she’s suffering Stockholm Syndrome after being captured by Treasury thinking. I would say she has tried too hard – not taking advantage of their immediate popularity after the July 4^th 2024 election to increase borrowing to fund national reconstruction.

Just a few weeks after the election I was warning how quickly the right-wing political agenda had instituted a Blitzkrieg of misinformation and innuendo driven stories about Labour’s financial incompetence. Much of the mud that has been thrown has stuck – “Rachel from Accounts” has become a deliberately demeaning and insulting term for our first female Chancellor. Yes, she has made errors – let him without sin cast the first stone… Admitting mistakes is not something the gammon-faced bully-boys from Eton and the Bullingdon Club are likely to do, especially when it’s a “Woman” doing a Tory Man’s job.

And of course, there is Boris Johnson – who let go at her in the Daily Mail at the weekend. He demanded her resignation because of her addiction to “tax and spend” policies, and said she’d lost the confidence of the markets. That’s Boris telling the Daily Mail what he thinks. We know what the market thinks of Boris.

Pot calling the Kettle black, indeed.

The Gilts Market will be painful for a number of days, but this should blow over.

Out of time, and back to the day job….

Bill Blain

Author, The Morning Porridge

CEO Windshift Capital

Partner Shard Capital