Long-term UK borrowing costs hit a 28-year high on Tuesday as investor fears over a potential change of Labour leadership triggered a sell-off in gilts and the pound. The yield on 30-year government bonds rose to 5.81%, the highest since 1998, before easing slightly after Prime Minister Sir Keir Starmer said he would not resign.
Investor strategist Neil Wilson of Saxo Markets warned that a leadership contest could lead to a “blowout” in longer-dated gilts, citing political, fiscal and inflationary risks. He said markets dislike uncertainty over who runs the government, and a left-leaning ticket could prioritise spending, making inflation stickier.
Cabinet ministers including Peter Kyle and Liz Kendall expressed support for Starmer, but several junior ministers resigned, calling on him to quit. Starmer told a cabinet meeting that the process for a leadership challenge had not been triggered and that the country expects the government to get on with governing.
The benchmark 10-year yield dropped back to below 5.1% after hitting 5.13% earlier, while the 30-year yield dipped to 5.78%. Higher yields, if sustained, can raise borrowing costs for the government, consumers and businesses. Yields on bonds of most major economies have been rising due to the inflationary impact of the Middle East conflict, but the UK has been hit especially hard.
April LaRusse of Insight Investment warned that UK bonds had “decoupled” from those of other countries, and a drawn-out transition could keep speculation alive. Two potential frontrunners to succeed Starmer, Angela Rayner and Andy Burnham, have hinted they would like higher public spending. Sterling fell 0.7% against the dollar to $1.352.
