FX.co ★ UK Bond Selloff as Reeves Mulls Dropping Tax Hike

The yield on the UK's 10-year government bonds surged by 13 basis points, reaching 4.57%. This increase followed reports that Chancellor Rachel Reeves is contemplating abandoning plans to raise income tax in the upcoming Budget on November 26. This potential policy shift has reignited concerns about how the government will address a fiscal shortfall that could reach up to £35 billion, given Labour's previous commitment not to increase basic or higher income tax rates. Chancellor Reeves had prepared two budget scenarios: one involving significant tax hikes and another based on more modest measures. However, political pressure is steering her toward the latter option. She is also reconsidering an exit tax on affluent individuals leaving the country and other measures aimed at limited liability partnerships. This uncertainty is arising amid divisions within the Cabinet and follows recent political instability surrounding Prime Minister Keir Starmer. Financial markets responded by scaling back expectations for interest rate cuts by the Bank of England, forecasting approximately a 75% likelihood of a rate adjustment in December. The increase in gilt yields could further complicate Chancellor Reeves's fiscal strategy and exert pressure on UK markets as the budget announcement approaches.