UK 30-year gilt yields reached their highest level since 1998 on Tuesday, touching 5.81% amid political uncertainty surrounding Prime Minister Keir Starmer, before easing to 5.76% by the close of trading. The 10-year yield also spiked to its highest since 2008 at 5.13%, later settling at 5.1%. The market turmoil was driven by speculation that Starmer could be forced to announce a departure timetable, though yields moderated after some cabinet ministers and Labour MPs voiced support.
Despite the easing, several ministers resigned during the day, leaving the prime minister in a precarious position. The political drama has pushed up UK borrowing costs, with markets pricing in the possibility of a more left-wing successor. The UK now has the highest borrowing costs of any G7 member, with yields rising at the fastest rate since the Middle East war began.
Kathleen Brooks, research director at XTB, suggested that the bond market could ultimately save Starmer, noting that it is unlikely bond traders would trust anyone else at this stage. She said: 'Until a challenge from the left of the Labour party is eradicated, or the government embarks on growth-positive economic policy, we do not see UK bond yields substantially falling from here.' The pound stabilised, with GBP/USD trading just above $1.35.
Jonas Goltermann, chief markets economist at Capital Economics, warned that the surge in gilt yields owes as much to rising energy prices as to the political upheaval, adding that 'things may get worse before they get better.' Some analysts have drawn comparisons to the 2022 Truss crisis, with the recent spike in yields potentially proving more severe.
