Long-term UK borrowing costs soared to their highest level in almost three decades on Tuesday, as fears over a potential change in Labour leadership triggered investor jitters. The yield on 30-year government bonds, or gilts, hit 5.81%, the highest since 1998, before falling back slightly after Prime Minister Keir Starmer said he would not resign.
The sell-off in UK bonds was driven by concerns that a leadership change could lead to looser fiscal discipline. Neil Wilson, an investor strategist at Saxo Markets, warned of a possible “blowout in longer-dated gilts” if a leadership contest ensues, citing political, fiscal and inflationary risks. Sterling fell 0.7% against the dollar to $1.352.
Cabinet ministers including Peter Kyle and Liz Kendall expressed support for Starmer, but several junior ministers resigned, calling on him to quit. The prime minister told a cabinet meeting that the process for a leadership challenge had not been triggered, and that the government must focus on governing.
Analysts noted that UK bonds have “decoupled” from other major economies, with domestic political risk adding to upward pressure on yields already driven by rising energy prices and Middle East tensions. April LaRusse of Insight Investment said any new leader would likely move quickly to reassure markets, but a drawn-out transition could keep speculation alive.
Potential frontrunners Angela Rayner and Andy Burnham have hinted at higher public spending, raising fears of a leftward shift. Mohit Kumar of Jefferies said any replacement would likely be “left leaning” and negative for long-dated gilts and the pound. Meanwhile, oil prices rose amid fragile ceasefire talks between the US and Iran, adding to inflationary pressures.
