(March 28): UK bonds declined, erasing gains after Wednesday’s announcement of a smaller-than-expected debt plan, as investors turned their attention to the country’s still-fragile finances and the risk of rising borrowing costs globally.

Gilts fell across the curve, underperforming European peers and sending the benchmark 10-year yield up as much as eight basis points to 4.81%. That’s the highest since mid-January, when gilts shouldered the worst of a worldwide bond selloff that wiped out Chancellor Rachel Reeves’s fiscal headroom.

While Reeves yesterday restored her fiscal buffer to exactly where it was in October, firms including BlackRock Inc, Allspring Global Investments and Fidelity International say the UK bond market remains very much at the mercy of external forces.

“Reeves has very limited headroom, and potential shocks — both domestic and international — are numerous,” said Lauren van Biljon, a senior portfolio manager at Allspring Global Investments.

The worry is that if global bond yields rise, inflation pressure persists and growth disappoints, that could spur another selloff in UK bonds and erode Reeves’ fiscal buffer again. The Office for Budget Responsibility (OBR) warned that the headroom would be wiped out if US President Donald Trump hits the rest of the world with 20% tariffs or if borrowing costs rise just 0.6%.

“The deterioration in UK public finances can’t be underestimated,” said Vikram Aggarwal, a fixed income investment manager at Jupiter Asset Management. He said the cheapness of gilts doesn’t make them an attractive buy.

The fragility of the UK’s finances is fueling expectations that the government will need to raise taxes or cut spending further in October, when it announces the Autumn budget. The OBR put at 46% the chance of Reeves breaking her fiscal rule that taxes should fund day-to-day spending.

“Gilts probably remain in no man’s land until the Autumn budget,” said Shamil Gohil, a fixed income portfolio manager at Fidelity International. “We will likely see some fiscal slippage and buffer erosion from now until then.”

It’s a quick reversal from Wednesday, when UK bonds had one of their best days of the year after the Debt Management Office announced a smaller-than-expected borrowing plan, with the share of longer debt drastically reduced. Yields on 30-year notes fell as much as nine basis points, the most since early February.

“Yesterday price action was primarily a function of the golden issuance numbers,” said Pooja Kumra, a senior UK and European rates strategist at Toronto Dominion Bank. “But reality is still that the UK is in a fiscal trap.”

Some funds including Vanguard took confidence from the government’s firm re-commitment to its fiscal rules, saying the relative cheapness of gilts outweighed the risks around the UK’s economic trajectory.

“Her commitment toward fiscal rules being ‘non-negotiable’ has suppressed fears about reduced fiscal headroom,” said Ales Koutny, the head of international rates at Vanguard, who reinstated his long-dated Gilts position versus Germany. “We expect the UK to go back to trade in line with US yields over the next few months.”

But markets have had an on-again-off-again relationship with gilts for months, flip-flopping between loading up on the bonds due to its high yields to bailing out of them on fear the Labour government will struggle to keep the nation’s deficit in check.

“The UK’s borrowing costs arguably remain just as vulnerable to spikes,” said Vivek Paul, the UK chief investment strategist of BlackRock. “Gilts could come under pressure once more.”

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