UK government borrowing costs edged higher on Monday as Keir Starmer's crucial speech failed to reassure bond markets, with investors remaining jittery over political instability and inflation fears. The yield on 10-year gilts rose eight basis points to 5%, while 30-year yields climbed 9.3 basis points to 5.67%, nearing last week's 28-year high of 5.78%.
Starmer Vows to Fight Leadership Challenge
In his speech, Starmer declared he would resist any leadership challenge and would not abandon his responsibilities after Labour's poor performance in recent elections. However, the address did little to calm markets. Susannah Streeter of Wealth Club noted that the speech had not "done the trick of calming bond markets," with jitters persisting due to a mix of political uncertainty and inflation concerns linked to the Middle East conflict.
Impact on Fiscal Headroom
Higher yields increase government borrowing costs and erode the fiscal headroom that Chancellor Rachel Reeves built through tax rises. Deutsche Bank's Sanjay Raja estimated that over half of the £24bn margin for error may already be wiped out by higher yields and weaker growth. Reeves has stressed the need to reduce debt interest, which consumes £1 in every £10 of public spending.
Political and Global Factors
Investors worry that a potential leadership change could lead to increased public spending and looser fiscal rules. Angela Rayner and Andy Burnham, possible successors, have hinted at higher spending. Additionally, rising oil prices due to the Iran war have heightened inflation fears, with the UK seen as particularly exposed. Capital Economics' Ruth Gregory noted that most of the recent yield rise stems from energy prices rather than domestic politics, adding that a resolution to the Iran conflict could lower yields regardless of political developments.
