UK long-term borrowing costs have surged to a 28-year high, intensifying pressure on Prime Minister Sir Keir Starmer as his leadership faces growing dissent within his own party. The yield on 30-year government bonds, known as gilts, jumped 13 basis points to 5.807%, while the 10-year gilt yield rose to 5.11%. This increase makes it more expensive for the government to borrow from financial markets, adding to fiscal concerns.
Market Reaction to Political Instability
The pound weakened significantly amid the political uncertainty, falling 0.6% against the US dollar to 1.352 and 0.2% against the euro to 1.152. London's FTSE 100 Index dropped over 1% in early trading before settling 0.5% lower, influenced by rising crude oil prices, which climbed 2% to over $106 a barrel due to the US-Iran deadlock.
Analyst Warnings
Analysts, including Saxo UK's Neil Wilson, warned of further market volatility and a potential 'gilt rout' until political leadership clarity is achieved. They highlighted risks from a fragile fiscal position and potential increased spending under a new, more left-leaning leadership. The combination of high borrowing costs and political turmoil could undermine investor confidence and economic stability.
Political Context
Prime Minister Starmer faces calls to resign from within his own party, with allies backing him amid the rebellion. The government's ability to manage the economy and restore market confidence is under scrutiny as borrowing costs reach levels not seen since the late 1990s.
