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The value of the pound has had the biggest single-day fall in months as the cost of 30-year government borrowing reaches its highest rate since 1998.
The yield on UK government bonds – also known as gilts – jumped to the highest level since 1998, at 5.698 per cent, meaning it costs more for the Government to borrow from financial markets.
Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.
The pound tumbled as the bond sell-off intensified, with sterling down 1 per cent to 1.34 US dollars and 0.6 per cent lower at 1.15 euros.
Read more: Chancellor under pressure as government borrowing costs surge to 27-year high
Read more: Chancellor will have to raise taxes despite lower borrowing, say economists
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It means the pound sterling is on course for the biggest one-day drop since April, when US President Donald Trump announced country-specific tariffs in a move that spooked markets.
It comes as worries mount over the UK’s finances, with Ms Reeves looking to fill an estimated £51 billion black hole.
The higher gilt yields compound the woes, increasing the cost of servicing the Government’s debt.
Government bonds have also been under pressure globally, with yields rising across the United States and Europe.
But the UK is facing particular home-grown challenges ahead of the autumn budget, with concerns that Ms Reeves will be forced to hike taxes and slash spending to balance the books.
The value of the pound is still higher than it has been for a large part of the year. In early September 2024, one pound bought $1.31.
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It comes as Sir Keir Starmer reshuffled his Downing Street team in a move that seeks to boost the government’s economic firepower ahead of the budget this autumn, leading to the suggestion that Ms Reeves’s role has been diminished.
Monday’s shake-up saw the Chancellor’s deputy, Darren Jones, move into a new role as chief secretary to the Prime Minister.
Sir Keir also brought in Baroness Minouche Shafik, a former Bank of England deputy governor, as his chief economic adviser and senior Treasury mandarin Dan York-Smith as his principal private secretary.
But speaking to Sky News on Tuesday, Home Secretary Yvette Cooper denied that the Chancellor had been “sidelined”, insisting the situation was “quite the reverse”.
She said: “I think the Prime Minister and the Chancellor have always worked extremely closely together and continue to do so.”
Neil Wilson, UK investor strategist at Saxo Markets, said: “The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules.
“30-year yields at their highest in almost three decades is not a good look for the Labour government, and underscores that there is little fiscal or economic credibility left.”
