Long-term UK borrowing costs have soared to the highest level in nearly three decades while the pound and stocks fell, as investors braced for a potential change of leadership, with cabinet ministers urging Keir Starmer to quit.
Starmer is consulting colleagues before a crunch cabinet meeting on Tuesday morning that comes after ministerial aides quit and more than 70 MPs publicly called for him to go.
With investors worried over chaos and potential changes to the fiscal rigour of Starmer’s government, the yield – effectively the interest rate – on 30-year government bonds jumped 11 basis points to 5.794%, the highest since May 1998.
The benchmark 10-year yield on UK government bonds (known as gilts) also rose 11 basis points to 5.11%, just below the highest levels since 2008 it hit in March amid fears that the Iran war will stoke inflation.
The pound dropped 0.5% to $1.354 and was 0.3% lower against the euro, at 86.8p a euro.
Neil Wilson, an investor strategist at Saxo Markets, said: “We could see a blowout in longer-dated gilts if this turns into a dogfight – political, fiscal and inflationary risks will rise.
“Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile and likely to become worse should a left-leaning ticket prioritise spending; and that this makes inflation stickier.”
Investors are concerned that, if Starmer is forced out of Downing Street, his possible replacements may seek to increase public spending and loosen the government’s fiscal rules. Two potential frontrunners to succeed him, Angela Rayner and Andy Burnham, have hinted that they would like to see higher public spending.
Mohit Kumar, the chief economist for Europe at Jefferies, said: “A managed exit would be our base case scenario. Any replacement would likely be left leaning and be negative for the long end of the curve and the currency.” He added he expected a widening between shorter- and longer-dated UK borrowing costs, and was betting against the pound.
Stocks were also under pressure, with the FTSE 100 index down nearly 1%. Banks
fell, with Barclays dropping 4% in early trade, while Natwest and Lloyds slipped more than 3%.
Gilt yields had already risen this week amid concerns over a jump in energy prices leading to higher inflation.
Oil prices rose nearly 1% on Tuesday as talks to end the US-Israel war on Iran appeared fragile. Brent crude futures increased rose 2.7% to $106 a barrel, while US West Texas Intermediate gained 99 cents, or 1%, to $99.06 a barrel.
Donald Trump said on Monday the ceasefire with Iran was “on life support” pointing to disagreements over several demands, such as the cessation of hostilities on all fronts, the removal of a US naval blockade, the resumption of Iranian oil sales and compensation for war damage.
Tehran also stressed its sovereignty over the strait of Hormuz, through which about a fifth of global oil and liquefied natural gas flows in normal times, and where hundreds of tankers and cargo ships remain trapped.
Suvro Sarkar, who leads the energy team at Australia’s DBS Bank, said: “Optimism regarding an imminent [peace] deal seems to be fading again and if we don’t see a deal by the end of May, then upside risks for oil prices are definitely on the table.”
Kathleen Brooks, the research director at XTB, said: “There is an upward bias for bond yields anyway, and the UK yields are facing a double whammy of an energy price spike and a political crisis.
“The risk is that we get a bond market meltdown in the UK in the coming days. If that happens, will it quiet the factions of the Labour party who have threatened to ignore the bond market, ditch fiscal rules and boost public spending even more?
“Right now, it’s hard to see how the bond market can stabilise, and there could be further downside ahead.”
