Borrowing costs at the highest level since 1998, the pound at a 14-month low and some major UK company shares dropping like a stone. For a government that had pledged a return to economic stability, it has been a tough start to 2025 for Rachel Reeves.

As the chancellor prepared to fly to China to promote closer economic ties with Beijing, the blow-up in the bond market appeared to ease on Thursday after a rough couple of days. But Reeves is still battling a political fire and comparisons to Liz Truss’s ill-fated mini-budget.

Conditions in the market for UK government bonds, known as gilts, have been far from helpful for Reeves. The yield – in effect the interest rate – on 10-year gilts reached the highest level since the 2008 financial crisis, driving up government borrowing costs and surpassing the levels reached after Britain’s shortest-lived prime minister detonated the bond market.

While the situation has steadied, on longer-dated 30-year bonds the yield still remains at the highest level since 1998.

If these levels are sustained, the higher cost of borrowing could wipe out the chancellor’s £10bn headroom against her self-imposed fiscal rules. Reeves has warned the rules are “non-negotiable”, teeing up the prospect of cuts to public spending to balance the fiscal arithmetic instead.

It is a challenge because persistently higher borrowing costs would mean the government shelling out billions of pounds more to service the nation’s £2.6tn debt pile. Even before the latest market shifts, the debt interest bill was on track to be about £100bn in the current financial year – a sum larger than the annual education budget – rising to more than £120bn by the end of the decade.

But while the gyrations in financial markets could have serious consequences, comparisons to previous crises are overblown. Britain is not on the brink of being forced to go cap in hand to the International Monetary Fund, and is not yet close to emergency intervention from the Bank of England.

So far the government believes conditions in the bond market remain orderly. It is a stark contrast to 2022. Back then, the market reaction to Truss’s surprise unfunded tax cuts was extreme: of the top 10 biggest daily moves in the gilt market in the past three decades, nine came in 2022.

The domestically focused FTSE 250 initially sold off on Thursday, before edging up 0.3% in the afternoon. Meanwhile retailers and housebuilders were among the heaviest fallers on the blue chip FTSE 100 index. The pound has fallen by about two cents against the dollar in recent days, to about $1.23.

However, in 2022, sterling fell to $1.14, the lowest level since 1985, while the meltdown in the bond market threatened to bankrupt a large number of pension funds with more than £1tn invested in them.

While the level yields has reached is historic, the speed of the change is far more ordinary. Yields have drifted higher in recent months, rather than rocketed in a short space of time – reflecting investors reacting to events, instead of panicking in response to shock news.

Much of the rise in gilt yields has been driven by global factors. Investors have steadily grown more worried that inflation could be stickier than first hoped – leading to fewer interest rate cuts from the world’s most powerful central banks. Since November, that has been turbocharged by the prospect of the US president-elect Donald Trump’s policies.

But there are domestic factors too. Britain is also experiencing a bout of inflation persistence, which could hold the Bank of England back from cutting interest rates. Labour has not helped: business and consumer confidence fell sharply after Reeves warned “painful” tax increases were required. Growth has stagnated over the whole second half of 2024. The chancellor’s £25bn increase in employer national insurance contributions could also stoke inflation this year.

Spying a political opportunity, the government’s critics have focused more on the latter, rather than the former. Still, how Labour reacts will have a big impact. Reeves may be hoping bond market conditions subside – a scenario many big investment companies expect. But she could still be overtaken by political and economic pressure – leading to difficult choices on how to respond.

There is a danger doom loop emerging. Tax increases or spending cuts could undermine Labour’s already shaky plans to grow the economy – which in turn could damage the public finances. It is a situation Reeves will want to avoid.