The FTSE 100 was on the back foot on Tuesday as UK gilts rose to a 27-year high, driven by concerns about the government’s borrowing and budgetary plans.
The pound also fell sharply against the dollar as the FTSE 100 gave up 0.3% to trade at 9,162.
“Gilt yields in the UK rose after the prime minister reshuffled the deck, seemingly sidelining his iron chancellor Reeves by poaching her deputy,” said Neil Wilson, Investor Strategist at Saxo UK.
“If the Treasury won’t break the rules, then perhaps Number 10 can? The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules. Long-dated gilt yields are now trading close to 27-year highs again with the 30yr above 5.7%.”
Rising bond yields are particularly affecting those FTSE 100 sectors most exposed to interest rates.
Housebuilders were broadly lower as investors fretted about interest rates remaining higher for an extended period.
Taylor Wimpey, set to lose its FTSE 100 status after falling 23% so far in 2025, was among the top fallers, declining 2.6% on Tuesday.
Persimmon lost 2.5% and Barratts droped 2.3%. Rightmove was also hit with a 2.2% decline.
Stocks that are considered to have ‘bond proxy’ attributes, such as reliable cash flows and progressive dividend policies, were out of favour as investors looked to bond markets as a lower risk opportunity to capture yields amid the gilt sell-off.
Stocks such as United Utilities, Whitbread, Land Securities, and SSE appear less appealing when investors can achieve a 5.7% yield on 30-year government debt. Some of these stocks will also feel the pinch of higher financing costs.
Marks & Spencer was the top faller with losses of 3.8%.
Stronger commodities helped BP, Shell, and Fresnillo rise by between 1% and 1.8%.
“Oil stocks and precious metals miners were the main gainers in London as gold and silver prices continued to surge,” explained AJ Bell investment director Russ Mould.
“Crude oil prices moved higher, with traders reacting to potential supply disruptions associated with the conflict between Russia and Ukraine.”
Only 17 of the FTSE 100 constituents were trading in positive territory at the time of writing.