Do the markets care if Rachel Reeves stays or goes?

When the Prime Minister Sir Keir Starmer gave his full backing to his Chancellor Rachel Reeves, the brief panic in the markets following her tearful performance in the House of Commons subsided. Gilt yields stopped rising, the pound clawed back some lost ground, and the markets recovered their nerve. It was easy to spin that as bond investors backing Reeves. But is that really true? The markets have seemingly already lost confidence in the Chancellor. They simply prefer stability to chaos, and they quite rightly fear that any of the plausible alternatives will prove even worse.

‘She will be the Chancellor for a very long time to come,’ said Starmer this morning. ‘She is going to be the Chancellor into the next election, and for many years after that.’ Even Sir Keir might find it hard to wriggle out of a statement as definitive as that, and it certainly seemed to have the desired impact. After spiking 16 basis points yesterday, one of the largest one-day moves since the Liz Truss debacle three years ago, gilt yields started to fall on Thursday morning. The Bank of England has not been forced to intervene, no one at the Treasury is searching around for the emergency helpline number at the IMF, and Reeves has not been hustled out of office amid a market panic.

And yet that is not quite the same thing as the ‘market backing Reeves’, even if that is how her team would like to portray it. There are two big flaws in that argument. First, bond investors have already lost faith in the Chancellor. Without growth, the UK is stuck with very high borrowing for a long time, and since it was already clear that Reeves had no idea how to get the economy expanding again, the UK will be charged a premium for issuing debt that will only get more and more unsustainable.

Next, none of the alternatives look any more appealing. Yvette Cooper is just a duller version of Reeves; Pat McFadden is far too political and has little interest in structural reform; and Torsten Bell is clever but a wonk, a red version of Kwasi Kwarteng. The problem is not the Chancellor. It is a Labour party that refuses to accept cuts to the welfare state and an electorate that is just as reluctant to allow spending to be reduced.

In reality, investors have little interest in whether Reeves stays or goes. They have already concluded that the UK is stuck in a doom loop of rising debt, interest rates, and stagnant growth – and which Chancellor has the grim task of dealing with that toxic combination doesn’t make much difference.