The pound fell to a 14-month low against the US dollar on Thursday morning as a bond market sell-off heightened investor concerns about UK assets, increasing pressure on Chancellor Rachel Reeves.

Sterling, which had been sliding recently, dropped by a cent at one point before recovering slightly to trade half a cent lower at $1.23.

The surge in yields on British government bonds, or gilts, raised the interest rates for holders and consequently increased UK borrowing costs. Later in the day, remarks from Chief Secretary to the Treasury Darren Jones helped ease market worries, as he assured the House of Commons that gilt markets were functioning smoothly, leading to a reduction in yields.

Jones said: “Underlying demand for the UK’s debt remains strong, with a generally well-diversed investor base.”

His intervention was more successful than that of Reeves the previous night, when she took the rare step of issuing a public statement for the second successive day to insist she had an “iron grip” on the public finances.

The sell-off continued on Thursday morning, with the yield on benchmark 10-year UK debt rising by as much as 0.12 percentage points to 4.921%, the highest since 2008, before easing back again.

Thirty-year bond yields, which hit 26-year highs this week, also rose, by about 0.1 points, before returning to be flat on the day.

Michael Brown, a senior research strategist at the brokerage Pepperstone, said said the dynamic of bond yields moving higher while the currency fell was a sign of investors “losing confidence in the government in question’s ability to exert control over the fiscal backdrop”.

“We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” Brown said, referring to the September 2022 budget under the then prime minister, Liz Truss, and her chancellor, Kwasi Kwarteng, that triggered a bond sell-off and turmoil in financial markets.

The increase in servicing government debts could cut into the chancellor’s expected financial headroom, and triggered speculation that she could be forced to announce unplanned austerity measures.

Matthew Amis, an investment manager at abrdn, said he expected Reeves would have broken her own newly drafted fiscal rules when the Office for Budget Responsibility presented its updated forecasts at the end of March, and could announce bigger cuts to government spending.

Chris Turner, the global head of markets at analysts ING, said: “Our best understanding of yesterday’s sterling sell-off is that the global bond market sell-off touched a raw nerve in the gilt market and that then the gilt spread widening prompted investors to cut back on overweight sterling positioning.”

In recent weeks, investors had been buying sterling as a counterweight to the strong dollar. “Investors had felt that sterling could best withstand the overriding strong dollar trend,” Turner said, but the gilt sell-off had dented that confidence in sterling and traders’ bets that the currency would rise could be pared back.

Despite recent losses, the pound is still comfortably above its record low after the 2022 mini-budget, when it plunged to near parity with the dollar.

The former Bank of England policymaker Martin Weale has suggested 1976, rather than 2022, provided a better comparison with the current market anxiety.

In 1976, the declining value of the pound compelled the Labour government to seek a bailout from the International Monetary Fund, which came with strict spending cuts.

Martin Weale, an economics professor at King’s College London, suggested that while an IMF bailout seems unlikely now, the UK government might seek the IMF's approval for its policies if the situation deteriorates further.

The Conservative and Liberal Democrat parties urged Chancellor Rachel Reeves to cancel her planned trip to China, where she is set to promote international investment with Bank of England Governor Andrew Bailey. Lib Dem leader Ed Davey called for an emergency fiscal statement to cancel the £25bn increase in employers’ national insurance contributions (NICs) set for April, aiming to boost economic growth and provide the Bank of England with more flexibility to reduce interest rates.

A Bank of England survey revealed that over half of UK firms plan to raise prices or cut jobs in response to the planned NICs increase. The survey, which included chief financial officers from various businesses, indicated that 61% expected to reduce profit margins, 54% planned to increase prices, 53% anticipated reducing employment, and 39% expected to pay lower wages. Companies could choose more than one response in the survey.