A late development – the UK government has insisted, firmly, that it will stick to the chancellor’s fiscal rules, following the further rise in bond yields today that have eaten into what headroom there was.

A HM Treasury spokesperson says:

“No one should be under any doubt that meeting the fiscal rules is non-negotiable and the Government will have an iron grip on the public finances.

“UK debt is the second lowest in the G7 and only the OBR’s forecast can accurately predict how much headroom the government has - anything else is pure speculation.

“Kick-starting economic growth is the number one mission of this Government as we deliver on our Plan for Change. Over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver economic growth and fight for working people.”

Time to recap….

The UK government is under more pressures to consider spending cuts or fresh tax rises after Britain’s 10-year borrowing costs rose to the highest level since the global financial crisis.

In a sign that the bond sell-off was escalating today, the yield on 10-year UK gilts rose to 4.825%, the highest level since the financial crisis more than 16 years ago.

The yield on 30-year gilts, which hit a 26-year high on Tuesday, continued to rise too.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said concerns about stagflation were brewing, given inflation is creeping up, pay growth is rising, and the economy is stagnating.

“There are concerns this may limit the interest rate reductions this year. It’s unclear to what extent the UK government’s investment in infrastructure will provide a boost to growth over the longer term. It seems appetite to buy long-term dated UK government debt has fallen amid this uncertainty.”

Economists warned that Rachel Reeves’s headroom to keep to her fiscal rules is being wiped out by the rise in borrrowing costs.

Although concerns over the strength of the UK economy are one factor hitting bonds, analysts said that the sell-off was also a global phenomenon, with fears over Donald Trump’s plans for import tariffs also moving markets.

Reports that Donald Trump is mulling over the idea to declare a national economic emergency to impose widespread tariffs added to those worries.

The pound weakened to its lowest level since last April, losing more than a cent to trade around $1.235.

The number of Americans filing new claims for unemployment benefit fell, while fewer new workers than expected were added to company payrolls last week.

Here’s a handy explainer of why the bond market is causing a headache for chancellor Rachel Reeves.

Donald Trump, rather than Rachel Reeves, is probably to blame for the rise in UK bond yields today, argues Laith Khalaf, head of investment analysis at AJ Bell.

Khalaf says:

“The bond market has taken fright from the growing sense of inflationary pressures in the air. The benchmark UK 10-year gilt has now risen to levels not seen since the financial crisis. It’s somewhat odd that bond yields have risen to new highs so long after interest rates have peaked, which suggests markets were complacent about inflation and overly confident that the Bank of England would cut rates sharply.

“Rachel Reeves appears to be one potential culprit for rising bond yields, which is probably wide of the mark. Reeves’ maiden Budget was marginally inflationary, and did increase overall government borrowing, but since the beginning of October the US and UK 10-year bond yields have tracked upwards almost hand in hand (see chart below). Those who think the current bout of bond market jitters is down to policies announced in the Budget need to explain why there has been such correlation in the upward march of bond yields both here and in the US.

Khalaf adds that there are “no easy answers” to explain why markets move in a particular way, especially over a short time frame:

However, the fact yields are rising on both sides of the Atlantic does suggest the new year has brought with it a focus on the incoming US president, and the potential for his trade and immigration policies to be inflationary, which has implications for both economies.

Bond investors might also be looking at the giant stacks of government debt already on the books on both sides of the pond and saying thanks, but no thanks.

“The US has the benefit or being the world’s reserve currency, which underpins demand for dollar denominated assets such as US Treasury bonds. Unless, that is, Donald Trump overachieves on his crypto goals and bitcoin becomes the world’s port of call for storing value (unlikely). Here in the UK higher yields put pressure on government finances and increase the risk that Reeves will come back with another tax raising Budget. A big saving grace is that the new chancellor has limited herself to one Budget per year, and so while we will get an updated set of forecasts from the OBR in March, which will lay bare the state of government finances, we don’t expect Reeves will have to balance the books though tax policies until the back end of the year. That gives plenty of time for the bond market to calm down, though that in turn will of course depend on whether global inflation actually rears its head again in 2025.

It’s all change at the top of Lloyd’s, the world’s oldest insurance market, founded in 1688.

It announced today that its chief executive John Neal will be leaving the company this year, after leading the company for more than six years. He will join London-based insurer Aon as global CEO of reinsurance and global. chairman of climate solutions, with his leaving date to be confirmed soon.

Neal steered Lloyd’s – which is made up of more than 50 insurance firms and over 380 brokers – through Brexit, rising interest rates and inflation, a global pandemic and geopolitical conflict such as Russia’s invasion of Ukraine.

Before he joined Lloyd’s, Neal was forced to take a pay cut as head of Sydney-based QBE, one of the world’s biggest insurers, because he failed to tell the board of his affair with his personal assistant.

The Lloyd’s chairman, Bruce Carnegie-Brown, is also leaving after an eight-year tenure, and will be succeeded by Sir Charles Roxburgh on 1 May, a former McKinsey consultant and ex-permanent secretary at the Treasury, who also served as director-general for financial services, where he had dealings with the insurance sector and Lloyd’s.

Back in September, Lloyd’s announced an increase in profit before tax to £4.9bn for the first six months of 2024, from £3.9bn a year earlier.

However, the group has repeatedly come under fire for its refusal to force its member syndicates to stop underwriting fossil fuel projects, and insurance firms operating in the market were the world’s biggest underwriters of oil and gas projects, research from the campaign group Insure our Future found last year.

At the time, Lloyd’s was also accused of “reparations washing” over its response to an academic review that laid bare its “significant role” in making the transatlantic slave trade possible.

Donald Trump is mulling over the idea to declare a national economic emergency to impose widespread tariffs, CNN reports, as the president-elect escalates threats to seize the Panama Canal, acquire Greenland and force Canada into becoming a US state.

The emergency powers move would allow Trump to implement broad tariff measures against both allies and adversaries through the International Economic Emergency Powers Act, according to four sources familiar with the discussions.

The emergency powers would give Trump significant latitude in constructing a new tariff programme without having to demonstrate traditional national security justifications, the sources told CNN. “Nothing is off the table,” one source familiar with the matter told the network, confirming that robust discussions about declaring a national emergency have taken place.

Director of the Institute for Fiscal Studies Paul Johnson has confirmed that the bond market selloff risks wiping out Rachel Reeves’s wriggle room - and potentially forcing her to make spending cuts.

Speaking to the Guardian, as the yield on 10-year UK debt hit its highest level since 2008, Johnson says:

“Broadly speaking what’s happened in bond markets since the budget is roughly speaking enough to wipe out the very small amount of headroom Rachel Reeves left herself.”

[this is the headroom to meet the chancellor’s fiscal rules, which include having debt falling as a share of the economy in five year’s time. In last autumn’s budget, it was just £9.9bn].

Johnson cautioned that many assumptions go into the Office for Budget Responsibility’s forecasts, so there could be other factors working in the chancellor’s favour.

But all else being equal, the bond market moves potentially point to spending cuts - given the Treasury has reiterated its commitment to the fiscal rules, and Reeves has promised not to make tax increases at her Spring statement, alongside the OBR’s forecast.

He explains:

“The only thing that can take the strain in any of this is your spending numbers.”

That points to trouble ahead, given that spending is already expected to be constrained after 2025-26.

Johnson says:

“The plans are already very tight, at 1.3% [increase in spending] a year, which implies at best freezes for most departments. Just take that down below 1.3% and that looks really tough. It’s going to be quite a bloody cabinet battle if that’s where we end up.”

US firms held onto staff where they could over the festive period.

The number of fresh ‘initial claims’ for unemployment support fell by 10,000 in the week to 4th January, to 201,000.

Economists had expected a small rise, to 214,000.

Just in: US companies added fewer employees to their payrolls than expected last month, new data shows.

Payrolls operator ADP has reported that US firms added 122,000 new workers in December, below the 140,000 which Wall Street economists predicted.

Services companies added 112,000 jobs – half in education and health services – while goods producers added 10,000 employees.

It’s a slowdown on November, when payrolls rose by 146,000, but hardly an economic emergency.

Nela Richardson, chief economist at ADP, says:

“The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains.

“Health care stood out in the second half of the year, creating more jobs than any other sector.”

CNN are reporting that President-elect Donald Trump is considering declaring a national economic emergency to provide legal justification for a large swath of universal tariffs on allies and adversaries.

Citing four sources, CNN say this would allow Trump to impose new tariffs on imports into the US.

CNN say:

The declaration would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, known as “IEEPA,” which unilaterally authorizes a president to manage imports during a national emergency.

Trump, one of the sources noted, has a fondness for the law, since it grants wide-ranging jurisdiction over how tariffs are implemented without strict requirements to prove the tariffs are needed on national security grounds.

“Nothing is off the table,” said a second source familiar with the matter, acknowledging the robust discussion over declaring a national emergency that has taken place.

No fina decision has been taken, though.

More here: Trump is considering a national economic emergency declaration to allow for new tariff program, sources say

The news gave Wall Street a jolt, knocking prices lower in the futures market:

The yield on 10-year UK government debt has hit its highest level since 2008, when the world was toppling into the great financial crisis.

Reuters’ David Milliken explains:

British government bond prices fell sharply on Wednesday, pushing 10-year yields to their highest since October 2008, above a level that had held since October 2023, while 30-year yields hit a new 26-year high.

Thirty-year gilt yields - which leapt on Tuesday - rose by 11 basis points to strike their highest since August 1998 at 5.359% at 11:30 GMT. Benchmark 10-year yields rose as high as 4.784%, up 10 bps on the day.

Gilts heavily underperformed against U.S. and German bonds.

Newsflash: UK government borrowing costs are rising at a faster rate, as the pressures on the Treasury intensify.

This is extending the bond sell-off yesterday, that drove up Britain’s long-term borrowing costs to the highest since 1998.

The yield, or interest rate, on UK 30-year bonds has jumped by nine basis points (or 0.09 percentage points) to 5.333%, a new 26-year high.

Ten-year gilts are also weakening, pushing up their yield by 9bps to 4.766%

This will continue to squeeze the amount of fiscal headroom available to chancellor Rachel Reeves to meet her fiscal rules, adding to the pressure to potentially cut public spending (or consider tax rises) to keep debt down.

Professor Costas Milas, of the management school at University of Liverpool, tells us the rise in 10-year bond yields will hurt UK companies:

There is a lot of talk about the 30-year UK cost of borrowing, but at the same time, the 10-year yield has also risen significantly. The 10-year government yield sets the tone for borrowing costs of all firms in the UK and as such, suggests much tighter monetary conditions than only a month ago when the Bank of England kept interest rates on hold.

My latest LSE blog piece examines all alternative monetary policy scenarios in light of (a) very weak economic growth momentum and (b) the uncertainty due to Trump’s possible trade wars to conclude that the first UK interest rate cut of the year should come in the beginning of February to hedge against a possible recession.

The pound is falling against the US dollar for the second day in a row, hitting a nine-month low.

Sterling has lost over 1% so far today, to $1.233, its lowest level since April 2024, as it continues to lose ground against the generally stronger dollar.

Matthew Ryan, head of market strategy at global financial services firm Ebury, reports that anxiety over the UK economy is causing some “jittery trading”:

“Sterling dipped below the 1.25 level on the dollar yesterday, a move driven almost entirely by broad dollar strength following Tuesday’s US PMI numbers. Concerns over the outlook for the UK economy continue to linger in the background, however, and that is partly keeping a lid on the pound, which has been among the worst performers in the G10 in the past week.

“We’ve not really yet had any hard data that takes into account the impact of Labour’s Autumn Budget, but reports that major retailers are expecting to either raise prices or reduce hiring as a result of the employer NI tax hike is leading to some jittery trading.

“This has been most prominently reflected in the bond market, with fears over the chancellor’s borrowing plans sending the 30-year gilt year to its highest level since 1998 this week.

“While the speed and extent of the move higher in bond yields has not been anywhere near as violent as that witnessed following the Truss budget in 2022, the impact of higher rates on the economy, particularly via higher mortgage rates, is not to be underestimated.”

The Bank of England plans to slash the “reporting burden” on UK banks, and wants to give insurers a free pass to invest in riskier assets without initial regulatory approval.

But the CEO of its regulatory arm, the Prudential Regulation Authority, insists he does not want to see a regulatory “race to the bottom”.

Sam Woods, who heads up the Bank’s Prudential Regulation Authority (PRA) made the comments during a hearing with the Lords financial services regulation committee this morning, looking at the ways that the PRA has been implementing new government objectives to boost competitiveness and growth of the City.

He said reforms were in train for the insurance sector, which could allow them to potentially invest in riskier assets quickier:

“We’re going to bring forward a proposal which we haven’t yet spoken about in public…that we call a matching adjustment investment accelerator …essentially deal with the issue that sometimes insurance companies need to invest very rapidly.

They do need authorisation for types of investment…So the idea is like a sandbox They should be able to go ahead, come to us later for approval.”

As for banks, Woods says:

“We’ve already cut reporting on the insurance side by a third as part of our sovereign UK reforms. We do want to look at what scope there is to reduce the reporting burden on the banks. And that’s something again, we’ll come forward on this year.”

However, he said that this was not about attracting business to the UK through weak regulation, explaining:

“I do think that we should avoid a race to the bottom so I don’t think that that is what parliament has asked us to do.”

Instead, Woods said it was an opportune time to stand back and review regulation that came into force in the wake of the 2008 financial crisis:

“We’ve built up all of this machinery over the last 10 or 15 years. Are there some places where it’s a bit overcooked? Are there some places where it’s a bit overlapping, some places where it’s a bit complex, where, if we were making that again with our new objective, we’d do it differently?

And in many cases, the answer that question will be ‘yes’. And that’s what we’re focused on.”

Just in: the UK has successfully sold over £4bn of government debt, despite the jitters in the bond market which drove up borrowing costs yesterday.

Britain’s Debt Management Office sold £4.25bn of five-year bonds, which mature in 2030, at an auction this morning.

The auction, which Bloomberg says is the biggest sale of that maturity in more than a decade, was comfortably over-subscribed.

The DMO received bids worth £12.75bn, three times as much as it wanted to sell, allowing it to cherry-pick the best offers for the debt.

The debt was sold at an average yield, or interest rate, of 4.490%.

That’s slightly higher than the yields on existing UK five-year gilts trading in the markets (which is 4.45% this morning, and peaked at 4.488% late last month).

These five-year bonds are used to price the interest rates charged on fixed-term mortgages, so the pricing is very relevant to the economy.

You can read the details of the auction here.

Shares in gambling firm Flutter have dropped in early trading after its profits were hit by a run of winning bets by customers on US sporting events.

Flutter told shareholders that the 2024/2025 NFL season to date has been “the most customer friendly since the launch of online sports betting”, with the highest rate of favorites winning in nearly 20 years.

This run of “very unfavorable US sports results” knocked $260m off Flutter’s profits, on an adjusted EBITDA basis, from November 12 to the end of the year. It had now lowered its revenue and profit guidance for the year.

In the NFL, 77% of favourites won in the fourth quarter of 2024, leading to payouts to customers. It also suffered from games being higher scoring than expected.

Flutter says it lost $74m on the Detroit Lions’ 40-34 win over the San Francisco at the end of 2024.

Flutter shares are down 2.5% in London, and rival Entain have dropped 1.2%.

Germany’s struggling economy has suffered another blow, with new data this morning showing a drop in manufacturing orders.

German factory orders tumbled by 5.4% month-on-month in November, statistics body Destatis reported, and were 1.7% lower than a year ago.

The fall suggests Germany’s economy may slide into “a light winter recession” says Carsten Brzeski, global head of macro at ING, adding:

In fact, notwithstanding some more technical rebounds, there is still no trend reversal in sight for the German industry. It’s bottoming out at best.

At the same time, disappointing retail sales suggest that the rebound in private consumption in the third quarter is unlikely to continue in the fourth quarter. Unless Christmas shopping brings a positive surprise, private consumption is set to drop, and ongoing political and policy uncertainty combined with re-accelerating inflation make any substantial rebound in consumption unlikely.

Anxiety that Donald Trump could trigger a trade war once he is reinstalled as US president have hit the Chinese currency today.

The yuan dipped to 7.3316 to the US dollar in trading today, its weakest level since September 2023, and below the daily ‘fix’ set by Beijing which dictates the levels where the yuan can trade.

The currency came under pressure after Donald Trump denied a newspaper report that said his aides were exploring tariff plans that would only cover critical imports.

Trump had previously indicated he could impose tariffs of 60% on Chinese goods into the US, which woud disrupt trade flows.

Wang Tao, chief China economist at UBS, explains:

The yuan is expected to face depreciation pressure, not only from tariff hikes but also from a significantly stronger dollar.

Despite these challenges, we believe the government is determined and capable of managing a relatively moderate depreciation.”

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

There are worrying rumblings in the bond markets, alarming investors and creating headaches for finance ministers including the UK’s Rachel Reeves.

The yields, or interest rates, on sovereign debt from the US, the UK and some eurozone countries has been rising in recent weeks, as bond prices have fallen.

Earlier this week, the yield on US 30-year Treasuries rose to its highest level in over a year, and yesterday the yield on 10-year Treasuries climbed six basis points to 4.69% – spooking Wall Street and prompting stocks to slide.

US Treasuries have been weakening as traders lose faith that central banks will cut interest rates as quickly as hoped. Strong data showing a surprise jump in job vacancies at US companies, and rising price pressures in the services sector, added to those worries on Tuesday.

UK debt has aso fallen out of favour with investors, on fears that economic growth will be weaker than expected.

This has pushed up Britain’s borrowing costs, with the yield on 30-year UK gilts hitting 5.242% on Tuesday, the highest in 27 years, and above the peak reached after Liz Truss’s mini-budget in 2022 sparked turmoil in financial markets, to hit the highest level in 27 years.

That eats into Reeves’s fiscal headroom and could force the chancellor to make fresh cuts to public spending to avoid breaking her own fiscal rules.

It also fuelled expectations that the UK could need more tax raises to finance its debt.

Jim Reid of Deutsche Bank explains:

The problem for the UK government is that with yields where they currently are, they are close to breaching their own fiscal rules and as such may require additional tax rises.

Donald Trump also gave investors a jolt yesterday, with a speech in which he didn’t rule out taking Greenland and the Panama Canal by force.

That may be a taste of the turbulent four years ahead, as Chris Weston, head of research at brokerage Pepperstone, explains:

Trump covered thoughts on Greenland, the Panama Canal, Mexico, Canada, the hostage situation in Gaza, Ukraine and tax and immigration policy. For the neutrals in the market, his views, if he is to be credible on the myriads of hard-hitting polices, further raise the prospect of market players navigating fast-moving, headline-driven markets. And where such an unconventional and hawkish approach is something that will soon lose its shock factor.

Whether Trump’s views impacted markets is unclear, but the totality of the speech won’t have done risk any favours, and the buyers (of risk) simply moved aside, and allowed those exiting long risk (equity etc), amid a pick in short positioning, to move prices lower with increased ease.

The agenda

• 7am GMT: German factory orders for November

• 10am GMT: Lords Financial Services Regulation Committee hearing with Bank of England’s Sam Woods

• 10am GMT: Eurozone consumer and economic confidence data for December

• 1.15pm GMT: US ADP private payroll data for December

• 1.30pm GMT: US weekly jobless claims data

• 7pm GMT: Federal Reserve releases the minutes of its latest FOMC meeting