Raeves's Tax Reversal Sparks Market Turmoil

UK Government Bond Yields Surge as Reeves's Tax U-Turn Reignites Budget Jitters The UK's government bond yields jumped the most since July, and the pound weakened, as reports that Chancellor of the Exchequer Rachel Reeves is dropping plans to raise income tax at this month's budget reignited concerns over the nation's finances. The yield on 10-year debt surged as much as 13 basis points to 4.57, while two-year peers, which are more sensitive to changes in monetary policy, jumped to 3.89. Money markets pared bets on Bank of England interest-rate cuts and now see less than 60 basis points of reductions by the end of next year. The sudden shift in market expectations was triggered by reports that Reeves is reconsidering her plans to increase income tax, a move that was expected to raise an additional £10 billion in revenue. The reversal has sparked concerns that the government's fiscal strategy may be under strain, leading to a sell-off in government bonds and a weakening of the pound. The yield on 10-year gilt, which had been trading at around 4.44, surged to 4.57, a level not seen since July, when the Bank of England raised interest rates by 50 basis points. The two-year gilt yield, which is more sensitive to changes in monetary policy, jumped to 3.89, a level that is 10 basis points higher than its previous close. The market impact of Reeves's U-turn was swift and significant. The pound weakened to a low of 1.283 against the US dollar, a level not seen since August. The FTSE 100 index also fell, shedding 0.5% of its value as investors became increasingly nervous about the nation's fiscal prospects. Rachel Reeves, the Chancellor of the Exchequer, has been under pressure to deliver a budget that balances the nation's finances without stifling economic growth. The government's plans to raise income tax were seen as a key component of its fiscal strategy, but the reversal of these plans has sparked concerns that the government may be struggling to meet its fiscal targets. The Bank of England, which has been monitoring the nation's fiscal prospects closely, has been forced to reassess its interest-rate policy in light of the latest developments. The central bank had been expected to cut interest rates by 25 basis points at its next meeting, but the revised market expectations suggest that this may no longer be the case. The future outlook for the UK's economy remains uncertain, with the government's fiscal strategy under strain and the central bank's interest-rate policy in flux. The market impact of Reeves's U-turn will be closely watched in the coming days, as investors seek to gauge the implications for the nation's finances and the economy.