Long-term UK borrowing costs soared to the highest level in almost three decades on Tuesday as fears about a change of Labour leadership triggered investor jitters and warnings of further bond market turmoil. The yield on 30-year government bonds, or gilts, hit 5.81%, a rise of 14 basis points and the highest since 1998.
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 makes inflation stickier.”
Yields later fell back slightly after Prime Minister Sir Keir Starmer told a cabinet meeting that he would not resign and that the process for a leadership challenge had not been triggered. Cabinet ministers including Peter Kyle and Liz Kendall made supportive comments, although several more junior ministers resigned throughout the day, calling on Starmer to quit.
The benchmark 10-year yield on UK government bonds dropped back to below 5.1%, having hit 5.13% earlier, while the 30-year yield dipped to 5.78%. Higher yields, if sustained, can raise the cost of borrowing for the government, consumers and businesses. Yields on the bonds of most major economies have been rising this year because of the inflationary impact of the Middle East conflict, but the UK has been hit especially hard.
April LaRusse, head of investment specialists at Insight Investment, warned that UK bonds had “decoupled” from those of other countries, and if that process continued, prices could fall further, pushing bond yields higher. “Investor attention has shifted to domestic political risk, particularly the possibility that a change in leadership could loosen fiscal discipline,” she said. Two potential frontrunners to succeed Starmer, Angela Rayner and Andy Burnham, have hinted they would like to see higher public spending.
Mohit Kumar, chief economist for Europe at Jefferies, said: “Any replacement would likely be left leaning and be negative for the long end of the curve and the currency.” Sterling fell 0.7% against the dollar on Tuesday, to $1.352. Gilt yields had already risen this week amid concerns over a jump in energy prices leading to higher inflation, with oil prices rising as talks to end the US-Israel war on Iran appeared fragile.
