• U.K. borrowing costs on Wednesday touched their highest level since Labour took office, after Finance Minister Rachel Reeves unveiled a vast package of tax hikes in her first budget.
• The gilt market remained relatively stable compared to past bouts of turbulence in recent years.

LONDON — U.K. borrowing costs on Wednesday touched their highest level since Labour took office, after Finance Minister Rachel Reeves unveiled a vast package of tax hikes in her first budget.

The yield on 10-year U.K. government bonds spiked as much as 7 basis points in the hours following Reeves' announcements from 12:30 p.m., marking its highest level since she entered the post at the start of July. The yield had cooled to a 3 basis point rise to 4.35% by 4:00 p.m. U.K. time (12:00 p.m. ET).

The yield on 2-year bonds, which in the U.K. are known as gilts, were over 6 basis points higher at 4.33% after rising by as much as 10 basis points.

Yields move in the opposite direction to prices, so a higher yield is generally seen as a sign of greater perceived risk for investors.

The budget contained £40 billion ($52 billion) worth of tax rises to plug a hole in the public finances — with Reeves committing to move toward a day-to-day spending surplus — and to allow for greater investment in public services.

The Treasury separately said it would raise gilt issuance by £22.2 billion ($28.9 billion) to £299.9 billion for the fiscal year to meet its net financing requirement.

The gilt market remained relatively stable compared to past bouts of turbulence in recent years.

Yields soared in September 2022 under former Prime Minister Liz Truss of the Conservative Party, after she announced billions in unfunded tax cuts. The market moves were so severe that they threatened to destabilize U.K. pension funds and required emergency intervention from the Bank of England, forcing Truss to reverse the majority of the changes and resign within weeks.

Analysts had said ahead of the October 2024 budget that such volatility was unlikely to repeat itself for various reasons. Those included the facts that many key policies had already been announced, and that any increase in borrowing would be to fund public investment.

Most importantly, the U.K. has seen inflation drop sharply since the Truss era, with the latest print at 1.7% versus 10.1% during Truss's premiership.

"We suspect that investors are now likely to be more tolerant of looser fiscal policy given inflation has fallen back to the Bank of England's 2% inflation target and interest rates are likely to trend downwards," Joe Maher, assistant economist at Capital Economics, said in a note Monday.

Sanjay Raja, chief U.K. economist at Deutsche Bank Research, said Reeves' budget "ushered in a marked shift in fiscal policy," with public services spending to rise by £50 billion by the end of the decade and investment spending to increase by another £20 billion.

"In the end, markets will have to grapple with higher borrowing... For now, markets remain broadly sanguine on the Chancellor's plans. But today's budget signals a lot more gilt issuance to come, relative to previous expectations," Raja said.

"Equally, while the Chancellor hit reset on the fiscal framework today, headroom remains a problem... With public spending pressures only likely to increase from here, the Chancellor will be walking a tight rope between even more tax hikes and/or cuts to spending to ensure she does not fall foul of her newly designed fiscal charter."

Correction: The headline has been updated to reflect that the government raised taxes in the Wednesday budget.