United Kingdom's bond market, stock market, and british pound all plunged, as investors sold British assets in a rapid response to the new Labour government's increased borrowing and inflation-boosting initiatives.

The sell-off pushed short-term borrowing costs to their highest since May, due to Chancellor of the Exchequer Rachel Reeves' budget on Wednesday, with investors betting that the Bank of England would reduce the extent of interest rate cuts. The adjustment in rate pricing impacted all UK assets, with the FTSE 250 index seeing its largest drop since early August and the British pound falling against all major currencies.

While this market drop is not comparable to the impact wave caused by the untaxed plan of Liz Truss two years ago, it highlights the need for Reeves to proceed cautiously to gain market support. The Labour Party had touted its return to financial prudence, but now finds that the bond market is intending to punish it for what it views as overly loose fiscal policies.

"There seems to be an inflation scare at the moment," said Evelyne Gomez-Liechti, Mizuho International strategist. Investors "remain concerned about the potential inflation impact of the budget, the extent of easing, and its implications for the Bank of England's rate cuts response."

The yield on 2-year UK government bonds rose 21 basis points on Thursday, closing up 12 basis points at 4.44%. The 10-year yield rose 18 basis points to 4.53% at one point, the highest in nearly a year. Its increase is still far from the approximately 100 basis points rise in yields three days after Truss' budget.

Swaps pricing shows the market is now betting on four rate cuts of 25 basis points each by the end of 2025, compared to five cuts last Friday.

The sell-off spread to other assets on the same day. The British pound fell to its lowest level since August, leading the decline of the UK residence builders in the United Kingdom stock market.

Other yield-sensitive sectors also fell, including real estate investment sector, retail, and utilities. Goldman Sachs Group's high-exposure portfolio of British stocks fell by 2.6%, the largest decline in nearly three months.

Reeves is trying to reassure the financial markets, stating that the Labour government's "primary commitment" is economic and fiscal stability. "Our room is larger than the room left by the previous government, and this is important," Reeves said in an interview on Thursday. "We have now put our public finances on a stable and solid path."