Britain's long-term government borrowing costs came under renewed pressure on Friday as political instability fears rocked bond markets and kept the pound on the defensive. The yield on 30-year UK government bonds, or gilts, surged 12 basis points to 5.774% in morning trading, climbing back close to 28-year highs reached earlier this week as Prime Minister Sir Keir Starmer faces a mounting leadership challenge.
Bond Market Jitters
With potential rivals positioning themselves for a formal Labour Party leadership challenge, 10-year gilts also suffered a sell-off, with yields rising 11 basis points to 5.104%. Gilt yields move inversely to bond prices, meaning prices fall as yields rise. Higher yields increase the cost for the government to borrow from financial markets.
Pound Under Pressure
The pound also weakened, falling as much as 0.4% against the US dollar before settling around 0.3% lower at $1.336. Political concerns added to worries over the inflation outlook amid the Iran war, sending London's FTSE 100 index down 0.8% to 10,288.7 in early trading. Oil prices rose 2% to over $107 a barrel as the US-Israel conflict with Iran showed no signs of resolution.
Market Analyst Views
Chris Beauchamp, chief market analyst at IG, said bond markets were fretting over the possibility of a more left-leaning premier after Greater Manchester Mayor Andy Burnham was offered a path back to Parliament when a Labour MP stood down. This follows Wes Streeting's resignation as health secretary on Thursday and former deputy prime minister Angela Rayner's clearance by HMRC over tax affairs, smoothing her path for a potential challenge.
Beauchamp commented: "Andy Burnham's long quest to find someone to make space for him in Parliament has finally succeeded, but the prospect of the 'King in the North's' return has not been good for UK borrowing costs. Worries about higher spending commitments have seen investors take flight from UK bonds. For a UK economy already facing a potential energy crisis sapping growth, the rise in yields is particularly grim news."
Susannah Streeter, chief investment strategist at Wealth Club, added: "Burnham's big hurdle of course is winning the by-election, and so this leadership race looks set to be long and cumbersome. Another bout of political infighting, with yet another Prime Ministerial shuffle under way, is hardly a good look for a country which needs to portray stability to attract investment."
