Moron premium back after Reeves’s income tax U-turn as Chancellor risks another ‘Liz Truss moment’

The so-called ‘moron premium’ on UK borrowing costs has doubled since Labour’s income tax U-turn last week, figures show.

Increased scepticism about Chancellor Rachel Reeves’ ability to balance the books means investors are effectively demanding bigger returns – or yields – to buy UK bonds which fund state spending.

Following the U-turn, yields jumped from 4.4 per cent to nearly 4.6 per cent and yesterday they remained close to that level.

Bond yields are generally linked to factors including interest rate expectations and global market movements. 

Investors can also attach a so-called ‘risk premium’ to account for worries about things like the political handling of public finances.

After Liz Truss’s disastrous mini-Budget of 2022 sent gilt yields soaring, investors spoke of a ‘moron premium’ attached to UK borrowing costs.

Borrowing costs: Increased scepticism about the Chancellor’s ability to balance the books means investors are effectively demanding bigger returns – or yields – to buy UK bonds

ING Bank’s James Smith said Labour’s latest U-turn had ‘left markets factoring in a little extra risk premium than it was before’.

Smith said ‘the risk premium in ten-year gilts has risen to 13 basis points (0.13 percentage points) from 6 basis points (0.06 percentage points) a few days ago’.

It came as David Zahn, head of European fixed income at Franklin Templeton, said tax rises by Labour are expected to be repeated next year and that yields on 30-year gilts – now just under 5.4 per cent – could hit 6 per cent, a level not seen since the late 1990s.

Zahn said: ‘They [Labour] don’t have a plan of how they’re going to bring the finances down.’

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