Rachel Reeves' spending plans have raised UK borrowing costs, making investors nervous.

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Britain's borrowing costs rose on Wednesday as investors failed to recognize the level of additional borrowing needed to fund Rachel Reeves' plans, upending an initially positive reaction to the Labor government's inaugural budget.

The yield on 10-year gold bonds rose 0.05 percentage points to 4.37%, hitting the highest in five months. The 2-year yield rose 0.08 percentage points to 4.34%.

As Reeves spoke, the yield on the 10-year bond initially fell to 4.21%. In her speech she pledged to fix Britain's public finances and said she would eliminate the government's daily spending deficit within three years. sooner than expected.

Analysts said markets were reacting to a $28 billion annual increase in borrowing from Congress after what the Office for Budget Responsibility said was one of the largest fiscal cuts in recent decades.

That's a lot more additional borrowing than expected. [that] Moyeen Islam, fixed income strategist at Barclays, said the market was completely unaware of this. From here on out, it's still quite a challenge.

The news was released alongside new figures from the Debt Management Office, which show debt sales are expected to reach 300 billion in the current financial year, up from previous estimates of 278 billion and slightly above investor expectations.

Citis Jim McCormick said the budget is very negative. He added that the initial market impact had been eased as the government made preparations, signaling plans to relax fiscal rules and borrow more.

If this had come out of nowhere, it would have been viewed more negatively, he said.

The OBR also said the scale of additional borrowing was not fully anticipated by investors and that interest rates were likely to rise in coming years.

Investors have responded by scaling back bets on rate cuts, with swaps markets now expecting rate cuts in the third or fourth quarter rather than the fourth or fifth quarter over the next 12 months. This raised yields on two-year maturity bonds, which are sensitive to interest rates.

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Andrew Pease, chief investment strategist at Russell Investments, said a large increase in government spending and a slower decline in public sector borrowing were negatives for gilt investors.

Labor's first budget tests investor appetite for investment, investment and the debt needed to fund investment plans without generating a sell-off similar to that under former prime minister Liz Truss's ill-fated 2022 mini-budget It was considered to be.

Ahead of Wednesday's announcement, the government said it would ease fiscal rules to target other debt measures that could free up room for additional borrowing.

That has added to investor anxiety about the level of gold issuance in the coming years and triggered a sell-off in recent weeks that has pushed the 10-year yield up from around 3.75% in mid-September.

UK small and mid-cap stocks performed better than gilt-edged stocks led by energy companies after tax changes for oil and gas stocks were less negative than feared.

The FTSE 250 rose as much as 1.7% during Reeves' speech, its biggest one-day gain since July, before rising again by 0.4%.

Laura Foll, portfolio manager at Janus Henderson, said don't underestimate how vulnerable some smaller companies are in this area. The budget has always provided the certainty and clarity that people want.

Video: Rough Politics: Labor Pains

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