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The UK government's cost of borrowing rose to its highest level in more than a year following Wednesday's budget.
The interest rate – called yield – that the government must pay to lenders when it borrows money from them over a 10-year period, climbed above 4.5% on Thursday before falling again.
Yields rose after the chancellor announced a big increase in government borrowing to finance spending projects, sparking expectations that interest rates would fall more slowly.
This is important because not only does it mean the government will have to pay more to borrow, but bond yields are also used as a guide to setting rates for common loans and mortgages.
Downing Street said it did not comment on market movements but insisted “stability is at the heart” of the chancellor's new fiscal rules.
The rise is partly a response to Chancellor Rachel Reeves' decision to significantly increase borrowing, but BBC economics editor Faisal Islam says it has so far been a natural adjustment in market rather than the panicked reaction that followed Liz Truss's mini-budget two years ago.
There has also been a larger rise in borrowing costs over the past month, but this is a global move led by the United States, he adds.
In the Budget, Reeves announced almost £70 billion of extra spending a year, funded by tax rises for businesses and additional borrowing.
Analysts said rising bond yields were an indication that markets were unhappy with increased government spending.
Kathleen Brooks, an analyst at trading firm XTB, said the move indicated the budget “was not well received” by markets.
“This is another sign that the Chancellor has overestimated the market's desire to absorb more of the UK's sovereign debt issuance,” she said.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said expectations for interest rate cuts had been revised down, given expectations that the budget could push up inflation in the over the next two years.
“Financial markets no longer expect rates to fall below 4% before 2026,” she said.
“This has been reflected to some extent in the rise in UK government bond yields, but given that sterling has remained lower against the dollar, it also indicates that there is growing nervousness about how Labor runs the economy.”
She said bond yields were set to remain “volatile” as institutions financing government borrowing “keep a more wary eye on where the bloated investment budget goes.”
Prime Minister Sir Keir Starmer's spokesman said the budget was “above all” about “restoring fiscal stability”.
“It is a matter of government policy not to comment on market fluctuations,” she said.
However, she said there was no hesitation about how much the government was borrowing.
“We have seen reactions from organizations such as the IMF that are favorable to this approach.”
