City investors are increasingly concerned about potential shifts in the fiscal discipline of a Labour government, as UK borrowing costs surged to levels not seen since 1998. The yield on 30-year government bonds jumped 11 basis points to 5.794% on Tuesday morning, the highest since May 1998, before retreating slightly after Prime Minister Keir Starmer affirmed he would not resign and that no leadership challenge had been triggered.
Market reaction to political uncertainty
The pound fell 0.6% against the dollar to $1.353 and dropped 0.3% against the euro. The FTSE 100 index declined nearly 1%, with bank shares hit hard: Barclays fell 4%, while NatWest and Lloyds slipped more than 3%. The benchmark 10-year yield eased to below 5.1% after hitting 5.13%, and the 30-year yield dropped to 5.76% from a 28-year high of 5.81%.
Investors are weighing the impact of a potential leadership change or prolonged internal Labour unrest. Angela Rayner and Andy Burnham, seen as possible successors, have hinted at higher public spending, raising fears of looser fiscal policy.
Analyst warnings
Neil Wilson, 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." Mohit Kumar of Jefferies added that a left-leaning replacement would be negative for long-term bonds and the currency, expecting a widening yield curve and betting against sterling.
Gilt yields had already risen this week due to energy price spikes and Middle East tensions. Oil prices climbed nearly 1% as ceasefire talks between the US and Iran appeared fragile. Brent crude rose 2.7% to $106 a barrel, while US West Texas Intermediate gained 1% to $99.06.
Kathleen Brooks of XTB warned: "There is an upward bias for bond yields anyway, and the UK yields face a double whammy of energy price spike and political crisis. The risk is a bond market meltdown in the coming days."
