Britain's long-term government borrowing costs came under renewed pressure on Friday as another wave of concern over political instability rocked bond markets and kept the pound on the back foot. The yield on 30-year UK government bonds, known as gilts, briefly touched a fresh 28-year intraday high of 5.815% before paring gains, standing 14 basis points higher at 5.799%.
The sell-off came as Prime Minister Sir Keir Starmer faced mounting threats of a leadership challenge, with Greater Manchester Mayor Andy Burnham positioning himself as a possible contender. With potential rivals preparing to trigger a formal challenge for the Labour Party leadership, 10-year gilts also suffered, with yields rising 14 basis points to 5.133%, firmly above the 5% mark.
Gilt yields move inversely to bond prices, meaning their prices fall when yields rise. Higher yields increase the cost for governments to borrow from financial markets. The pound also weakened, dropping as much as 0.4% against the US dollar before settling around 0.3% lower at $1.336.
Political concerns added to worries over the inflation outlook amid the Iran war and soaring oil prices, sending London's blue-chip FTSE 100 index sharply lower. The index fell 1.3% to 10,234.46 in mid-morning trading on Friday, while oil prices rose 3% to over $109 a barrel as a resolution to the US-Israel conflict with Iran proved elusive.
Market Analysts Weigh In
Chris Beauchamp, chief market analyst at IG, said bond markets were fretting over the possibility of a more left-leaning premier after Burnham was offered a path back to Parliament following a Labour MP's resignation. This follows Wes Streeting's resignation as health secretary on Thursday and former deputy prime minister Angela Rayner's clearance by HMRC over her tax affairs, smoothing her path for a potential challenge.
Beauchamp noted: "Andy Burnham's long quest to find someone to make space for him in Parliament has finally succeeded, but the prospect of the 'King in the North's' return has not been good for UK borrowing costs. Worries about higher spending commitments have seen investors take flight from UK bonds. For a UK economy already facing a potential energy crisis, sapping growth, the rise in yields is particularly grim news."
Susannah Streeter, chief investment strategist at Wealth Club, added: "Burnham's big hurdle of course is winning the by-election, and so this leadership race looks set to be long and cumbersome. Another bout of political infighting, with yet another Prime Ministerial shuffle under way, is hardly a good look for a country which needs to portray stability to attract investment."
