The 30-year borrowing costs of the UK government rose to their highest levels since 1998 on Tuesday and sterling fell over 1% as major investors grew increasingly worried about the UK government’s ability to manage its finances.

The FTSE 250 fell more than 2%.

The yield — interest rate — on 30-year UK government debt securities (bonds) rose to 5.723%.

Yields are a measure of the interest rate that investors demand when lending to a government or company.

Economists are concerned that UK finance minister Rachel Reeves may announce tax rises in the autumn budget.

Lloyds FX strategist Nick Kennedy told Reuters: “The UK has had a perilous (fiscal) backdrop and that’s going to continue.

“Over the summer, there has been a bit of a risk premium built into the rates market. Investors are now wanting more of a risk premium for sterling as well.”

Santander bank said it now expects the UK central bank to hold rates at 4% until the end of 2026, instead of a previous prediction of two cuts next year.

The UK now faces weeks of speculation on possible tax rises, potentially harming investment confidence, ahead of a likely November budget.

“With each gilt ‘episode’ and subsequent rise in yields we are getting closer to the endgame where the government’s options are running out,” said BlueBay Asset Management fund manager Neil Mehta.

“The endgame could consist of the government reneging on manifesto commitments and possibly even the end of Starmer/Reeves, but ultimately the UK’s economic problems lie deep (energy, housing, labour) which could take a much longer time and bigger political shakeup.”

Kathleen Brooks, research director at XTB, said: “There could also be some concern that Chancellor Rachel Reeves is being ‘managed out’.

“The last time there was a threat to Reeves’ position, back in early July, bond yields jumped as the market worried that she could be replaced by a more left-leaning member of the Labour Party.”