Speculation that a poor showing for Keir Starmer's Labour Party in local elections could trigger a leadership challenge is unnerving UK bond markets. Investors fear that potential successors such as Angela Rayner or Andy Burnham might loosen fiscal rules, increasing government borrowing.
The yield on 10-year UK government debt has risen above 5%, the highest since 2008, while 30-year yields hit levels not seen since 1998. This sell-off has been more pronounced in the UK than in other G7 nations, partly due to political uncertainty.
Analysts note that comments from Burnham, who argued Britain was too 'in hock to the bond markets', previously caused yields to rise. Although he has since moderated his stance, the City remains wary of a shift towards higher spending under new leadership.
However, some investors believe that any successor would have limited room for radical fiscal change, given already high tax levels and elevated government spending. The Bank of England may also be forced to raise interest rates in response to inflation pressures.
