Rachel Reeves is desperately trying to reassure the financial markets amid turmoil triggered by her Budget.

The Chancellor on Wednesday announced £40 billion in tax rises and the biggest borrowing splurge in decades.

The yield – or interest rate – on a 10-year government bond, an indicator for the cost of state borrowing, hit 4.568% on Thursday afternoon, the highest point since August 2023.

The pound also weakened on Thursday, and was down about 0.75% to 1.286 US dollars, a more than two-month low.

Sterling was also down about 0.8% to 1.185 euros.

Ms Reeves insisted the “number one commitment” of the Labour Government is “economic and fiscal stability”.

She told Bloomberg: “We have more headroom than the previous government left us, and that is important.

“We have now put our public finances on a stable and a solid trajectory.”

The Office for Budget Responsibility (OBR), the Government’s official forecaster, projected that, under the new spending plans, UK inflation is set to stay above the Bank of England’s target of 2% until 2029.

Susannah Streeter, head of money and markets for Hargreaves Lansdown, said: “Fresh nervousness has crept into markets about the prospects for the UK economy, just a day after Rachel Reeves delivered Labour’s first Budget for 14 years.

“Initial financial market reaction was sanguine, but investors appear to have taken flight after picking over the bones of the huge tax and spending plans.

“Expectations for interest rate cuts have been scaled back, given projections that the Budget could push up inflation over the next two years.

“Financial markets are now not expecting rates to fall below 4% until 2026.”

Yields on UK government bonds, also known as gilts, move inversely to prices.

They had already moved higher on Wednesday in the wake of chancellor Rachel Reeves’ autumn Budget.

Ms Reeves announced almost £70 billion of extra spending each year, funded by business-focused tax hikes and additional borrowing.

The Office for Budget Responsibility (OBR) called it “one of the largest fiscal loosenings of any fiscal event in recent decades”.

Analysts said the bond movement was a sign that markets were responding negatively to the increase in spending.

Kathleen Brooks, an analyst at trading firm XTB, said the movement indicated that the Budget “has not been well received” by markets.

She said: “This is another sign that the Chancellor overestimated the market’s desire to absorb more sovereign debt issuance from the UK.”

As well as a rise in gilt yields, the pound also weakened against the dollar, falling to 1.2856 dollars after 3pm.

Kyle Chapman, an analyst at trading firm Ballinger Group, said the fall in the pound and rise in gilt yields indicated that the market had decided Labour had “overextended” with its borrowing and spending plans.

Sterling also lost more than 1% against the euro, though Chris Turner, ING’s global head of markets, who also heads up its UK research, said the movement was “nothing like the stress seen under the Liz Truss budget” when it plummeted 6%.

“But nonetheless sterling is reacting to Gilt supply risk today,” he added.

The FTSE 100 was down 0.87% on Thursday afternoon, having closed on Wednesday at its lowest point since August.

Matt Britzman, an analyst at investment firm Hargreaves Lansdown, said yields will be “watched closely” in the aftermath of the Budget.

He said investors are “re-assessing where UK interest rates might end up, given that the investment plan for growth is likely to add inflationary pressures into the economy”.

Downing Street would not be drawn on the market reaction to Ms Reeves’s Budget.

“It’s a matter of Government policy not to comment on market fluctuations,” the Prime Minister’s official spokeswoman said.

The OBR’s latest forecasts on the spending plans also indicated that inflation is set to stay above the Bank of England’s target of 2% until 2029.

This means inflation is predicted to average 2.5% this year and 2.6% next year.

The official forecaster said that inflation would then come down, assuming “the Bank of England responds” to help bring it to the target rate.

The Bank of England has used higher interest rates in recent years to help bring down the rate of UK inflation after it soared to 11.1% in 2022.

The interest rate, which helps to dictate mortgage rates, currently sits at 5% after most recently being reduced in August by Bank policymakers.