UK borrowing costs are on the rise yet again as markets react to chancellor Rachel Reeves's proposal to increase government borrowing by ￡32bn a year. This morning, yields on two-year and 10-year gilts rose by approximately three basis points, marking the tenth consecutive day of increases for the two-year bond – a streak not seen since 2006.

In early trading, UK bond yields reached their highest levels of the year, with the benchmark 10-year gilt yield hitting 4.526% in global trading. This level matched Thursday’s peak following Reeves’s budget statement, which has led investors to anticipate a slower pace of interest rate cuts from the Bank of England. Since then, yields have slightly retreated to 4.456%.

The bond market has been under scrutiny since Reeves's budget announcement, which included significant borrowing alongside tax increases of about ￡40bn. However, while there has been a noticeable reaction in the market for UK government bonds, also known as gilts, it has not so far been comparable to the turmoil following the mini-budget of Liz Truss and Kwasi Kwarteng in 2022.

Read more: FTSE 100 LIVE: Stocks tick up as Reeves seeks to calm bond markets

This Friday, Moody’s released its budget analysis, where it warned about the potential risks associated with Reeves's fiscal plans, describing the increased borrowing as an “additional challenge” to managing the UK's public finances.

The rating agency said that the higher borrowing could elevate the cost of issuing debt, especially given that Reeves has revised the UK’s fiscal rules, leaving limited room for error in the face of unexpected economic shocks.

Moody’s noted that while the budget aims to stimulate day-to-day spending and government investment, it does little to enhance UK economic growth projections, which are expected to average only 1.7% from 2025 to 2027. The agency pointed out that structural issues, such as rising labour market inactivity and stagnant productivity, need to be addressed for sustained growth.

In response to the recent sell-off in gilts, which drove borrowing costs to their highest levels this year, Reeves doubled down on the government’s commitment to economic and fiscal stability. She said in a Bloomberg TV interview that robust fiscal rules have been established, promising significant fiscal consolidation.

Read more: From mortgages and wages to pensions, the major UK budget talking points

Moody’s further cautioned that the market remains sensitive to any missteps in UK policy, a sentiment echoed in light of past fiscal disruptions. They noted that frequent changes to the UK’s fiscal framework have undermined its effectiveness as a credible anchor for policy. Nonetheless, Reeves’s shift to a stricter three-year timeline for meeting her revised fiscal targets has been seen as a step towards reinforcing credibility in her approach.