The UK bond market is bruised this morning after a day of political turbulence drove up Britain’s borrowing costs. UK long-term bond yields hit their highest levels in 28 years on Tuesday, as fears about a change of Labour leadership triggered investor jitters and warnings of further bond market turmoil.
However, this morning, Keir Starmer remains in post having fought back against pressure to lay out a departure timetable, with health secretary Wes Streeting not having launched a challenge yet. Many investors have warned that if Labour tilted to the left, the bond market would balk at the prospect of higher borrowing and spending.
The prospect of Reform winning the next election, and Nigel Farage entering Downing Street, appears to also be a factor pushing up yields, after the party made gains in last week’s local elections. Ipek Ozkardeskaya, senior analyst at Swissquote, explains: "Brits are grappling with their own political shakeups after Nigel Farage scored big in the latest elections. The name Farage resonates in markets as a clearer path toward looser fiscal policy, higher spending and larger deficits, just as investors are already worried about Britain’s debt and inflation outlook. That combination is pushing investors to demand higher compensation to hold UK government debt, sending the UK 10-year gilt yield back above 5%. That’s the highest level since 1998."
Yesterday’s sharp moves in bond markets were clearly triggered by the crisis gripping the Labour government, with Streeting supporters pushing for a swift resolution, while allies of Greater Manchester mayor Andy Burnham argue he’s the answer to the current malaise. Earlier this week, market strategist Bill Blain of Wind Shift Capital argued that investors might not see Reform as a ‘safe pair of hands’, writing: "Who in Reform is going to run the bond market / spending plan optimisation game? What are they going to do to solve the housing crisis – which isn’t about building 1.5 million executive homes in the next 3 years but about supplying decent social and affordable housing for young people to have housing security and start family formation? Who in Reform will be looking at the welfare budget (which now pays £39 billion, two-thirds of the defence budget, on housing benefits)? Who in Reform will be making the calls on the NHS, Defence and, yes, the greatest immediate challenge to England since the Armada hove into view – filling potholes? Reform has clear intent to govern. Over the next three years – how will they persuade the bond market they can?"
The UK government will outline its legislative plans today in the King’s Speech, which could also bring Starmer some respite from troublesome ministerial resignations and demands for his resignation. The agenda includes the IEA monthly oil market report at 10am BST, Eurozone GDP report for Q1 2026 at 10am BST, US producer prices inflation report for April at 1.30pm BST, and a speech by Bank of England policymaker Catherine L Mann on ‘The UK’s international exposures and vulnerabilities’ at 3pm BST.
