Gilt Yields Surge Amid Government Tax Plan U-Turn

British government bond prices plummeted due to an unexpected report that the government might not raise income tax rates in the next budget. This led to a significant surge in yields, marking a major market shift. Finance Minister Rachel Reeves' previous statements had suggested different fiscal strategies.

The British bond market faced turmoil on Friday as the Financial Times reported a significant policy reversal by the government, threatening to abandon plans to hike income tax rates. As markets opened, bond prices dropped sharply, causing yields on long-dated gilts to surge by 12 basis points.

Early trading showed the 20-year yield at a striking 5.225% by 0809 GMT. This uptick seems influenced by expectations around the government's fiscal decisions, specifically amid Finance Minister Rachel Reeves expressing the potential necessity for tax increases.

Investors were taken aback by this news, considering Reeves' recent statements implied maintaining tax rates would require substantial investment cuts. This policy ambiguity has spurred uncertainty and heightened market sensitivity.

(With inputs from agencies.)