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The rout in sterling and U.K. bond markets worsened on Monday as investors took fright at the new government's sweeping and unfunded tax cuts.

By mid-morning in London, yields on U.K. Gilts had soared as markets priced in more interest rate hikes from the Bank of England in response to a mini-budget seen by most analysts as inflationary. Expectations of a strong monetary policy reaction helped the pound to recover most of the ground it lost at the opening, when it fell to a new all-time low against the dollar.