UK 20- and 30-year gilt yields hit highest since July 1998
The United Kingdom's long-term borrowing costs have surged to levels not seen since the early period of Tony Blair's premiership, coinciding with intensified speculation regarding the future of Labour leader Keir Starmer.
According to , yields on both 20-year and 30-year UK government bonds have risen beyond the peaks recorded earlier this month, reaching their highest points since 1998.
Data from the London Stock Exchange Group (LSEG) indicates:
- UK 20-year gilt yield increased to 5.734%, the highest since July 1998, up 12 basis points on the day.
- UK 30-year gilt yield rose to 5.794%, the highest since May 1998, up 11 basis points on the day.
Chris Beauchamp, chief market analyst at investing and trading platform IG, commented on the situation:
"It’s time for political turmoil in the UK all over again, as we wait to see if the PM can survive the day. The likely defenestration of Keir Starmer would be the start of more instability, with no guarantee that his successor can hold the fractious Labour Parliamentary Party together. There is a significant possibility that a ‘soft left’ candidate will win an extended contest with a promise to open the spending taps, and markets are already demanding higher borrowing costs on this prospect."
Strategist: Risk of UK bond 'blowout' if there's a political dogfight
Neil Wilson, investor strategist at Saxo UK, noted the sharp increase in gilt yields amid rising pressure on Prime Minister Keir Starmer to resign.
"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 this makes inflation stickier."
This morning’s jump in UK borrowing costs follows comments from Darren Jones, the chief secretary to the Prime Minister, who told broadcasters that Keir Starmer is "listening to colleagues." Jones stated:
"I spoke to the prime minister last night, as you would expect, and he is talking to colleagues who have raised issues yesterday. But he was also very clear, as I’m sure all of my colleagues are, that coming into the office this morning, as we all are doing, we’re absolutely focussed on our jobs, on delivering the things that we’ve promised to deliver for the public."
Andrew Sparrow is live-blogging ongoing developments on this dramatic day in UK politics.
MUFG: Leadership contest would be negative for pound and UK bonds
The pound sterling continues to weaken, declining by two-thirds of a cent against the US dollar to $1.354.
Lee Hardman, currency expert at Japanese bank MUFG, reports that political uncertainty in the UK is adversely affecting the pound and driving bond yields higher.
"So far the market moves have been relatively modest but are beginning to reflect building unease over the future of Prime Minister Keir Starmer who is facing growing pressure from within the Labour party to step down. With more than 70 Labour MPs publicly calling for Starmer to stand down, and defence secretary John Healey privately urging Starmer to consider plans for handing control to a successor,"
"Pressure intensified yesterday on Starmer after four ministerial aides quit the government saying they no longer believed he could turn things around. The latest developments increasingly look like the end of the road for Keir Starmer as prime minister. A leadership contest whether immediate or more drawn out will add to political uncertainty in the near-term which is negative for the pound and gilts. The risk of a bigger sell-off will increase if Labour shift towards the left."
FTSE 100 hits lowest since 31 March
The London stock market opened lower, with the FTSE 100 index falling by as much as 1.1% at the start of trading, down 117 points to 10,152 points, marking its lowest level since the end of March.
Banks led the declines, with NatWest down 4.6%, Lloyds Banking Group down 4.1%, and Barclays down 4%.
Derren Nathan, head of equity research at Hargreaves Lansdown, attributed some of the market weakness to international and domestic factors:
"Back at home, rising government borrowing costs aren’t helping either, with Prime Minister Sir Keir Starmer’s leadership under increasing pressure. The potential for a fiscally looser successor may be weighing on rate expectations, but the inflationary influence of higher-for-longer oil prices is likely to be the bigger driver."
"The seemingly unbreakable diplomatic deadlock between Tehran and Washington is hurting stocks."
UK borrowing costs jump after cabinet ministers urge Starmer to quit
UK government borrowing costs increased at the start of bond market trading amid escalating political uncertainty ahead of a cabinet meeting.
The yield on benchmark 10-year UK gilts rose by nearly 10 basis points to 5.1%, up from 5% the previous evening. Bond yields rise when prices fall, and this move adds to borrowing cost increases observed the day before.
Longer-dated borrowing costs also climbed, with the 30-year UK bond yield increasing by 10 basis points to over 5.77%.
Michael Brown, senior research strategist at brokerage Pepperstone, explained bond investors' concerns:
"The market’s main concern here, and the reason for this Gilt underperformance, is twofold – firstly, that a new PM would shift to the left, and loosen/scrap the UK’s current fiscal rules; and, secondly, that doing so would exacerbate the UK’s inflation problem. With political uncertainty likely to persist for a while, and the fiscal rhetoric only set to ramp up, those considering buying the dip in Gilts may be minded to wait a while."
Investors ramp up bets on Bank of England rate hikes
Financial markets in the City of London have increased their expectations for UK interest rate rises this year.
Money markets are now pricing in 68 basis points of interest rate increases from the Bank of England by December, up from 56 basis points the previous day. This suggests traders anticipate two rate hikes this year, totaling 50 basis points, with a third hike considered more likely.
The increase follows a rise in the oil price, with Brent crude up 1.25% to $105.50 per barrel, an inflationary factor. It may also reflect political uncertainty, as a new prime minister potentially loosening fiscal policy through increased spending and borrowing could prompt the Bank of England to tighten monetary policy to mitigate inflation risks.
Jefferies investment bank’s base case scenario anticipates a managed exit for Keir Starmer. Economist Mohit Kumar conveyed to clients:
"Any replacement would likely be left leaning and be negative for the pound, and longer-dated government bonds."
Introduction: Pound 'weighed down by political uncertainty' over Starmer's future
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
The City of London faces another political crisis as Prime Minister Sir Keir Starmer encounters increasing calls to announce a timetable for his departure.
The bond market remains under close scrutiny following Starmer’s recent speech, which failed to reassure investors and led some Labour MPs to advocate for his resignation.
reported that two senior cabinet ministers, Foreign Secretary Yvette Cooper and Home Secretary Shabana Mahmood, advised the prime minister to oversee an orderly transition of power after last week’s local elections.
This morning, the pound has declined against the US dollar, dropping half a cent to $1.3560.
IG analyst Tony Sycamore noted:
"Sterling is being weighed down by political uncertainty as PM Keir Starmer faces pressure to step down."
City investors are focused on Westminster, where Starmer is scheduled to hold a cabinet meeting today.
Bond yields, which increase when prices fall, could rise further if traders anticipate that a leadership change would result in higher spending, increased borrowing, and a departure from current fiscal rules.
Jim Reid, strategist at Deutsche Bank, explained:
"With a Cabinet meeting expected this morning, today could be a big day in determining Starmer’s future. In response to the uncertainty, 10-year UK gilt yields rose +8.6bps to 5.00% yesterday, whilst the 30-year yield rose +9.3bps to 5.67%, given expectations that a new Labour leader may face pressure to ease the fiscal rules and raise gilt issuance."
The agenda
- 10am BST: ZEW economic sentiment index for the eurozone
- 11am BST: NFIB US business optimism index
- 1.30pm BST: US CPI inflation report for April
