UK 10-year gilt yield tops 5% as leadership crisis deepens

The UK 10-year gilt yield topped 5% in May, the highest since 2008, as investors priced in the risk that Starmer's successor will abandon fiscal discipline.

"This trade-off between fiscal consolidation and maintaining popularity is the biggest conundrum," Edward Allenby at Oxford Economics said. "What the bond market wants isn't going to be popular with voters."

The 30-year yield neared 5.9%, a 21st-century record. The selloff comes as Polymarket traders price a 73% probability that Starmer will be gone by the end of 2026, less than two years after Labour's landslide general election win. The FTSE 100 has gained just 65% since the June 2016 Brexit referendum, compared with a 252% advance for the S&P 500.

The front-runner to replace Starmer is Manchester Mayor Andy Burnham, who is standing in a June 18 local election for the parliamentary seat he needs to directly challenge the prime minister. Burnham has said the government shouldn't be "in hock" to the bond market and pledged to borrow to nationalize public utilities — a platform that could trigger another Liz Truss moment, when gilt yields surged and the pound cratered after the former Conservative prime minister's September 2022 mini-budget.

The Fiscal Bind

Starmer's finance minister, Rachel Reeves, has played nice with investors by sticking to fiscal rules that require the UK to balance spending with tax revenue and reduce the debt-to-GDP ratio. But that has alienated voters. The most visible consequence came in April 2025, when Labour hiked the National Insurance payroll tax to help balance the books, making it more expensive for employers to fund entry-level jobs at a time when more than 16% of Britons ages 16 to 24 are unemployed.

Labour suffered a bruising defeat in May's local and mayoral elections. Even former Prime Minister Tony Blair argued in a 5,700-word essay this week that the government has failed to prioritize growth.

The last time UK political instability triggered a comparable bond rout was September 2022, when then-Prime Minister Liz Truss's mini-budget sent the 10-year gilt yield surging more than 100 basis points in three days and forced the Bank of England into emergency bond purchases. The current selloff has been more gradual but the yield level is now higher — the 10-year gilt averaged about 3.5% before Truss's budget, compared with above 5% today.

What Comes Next

Burnham isn't the only candidate whose policies could spook markets. Former health minister Wes Streeting supports hiking the capital-gains tax, which would make Britons more reluctant to invest in stocks even as the household savings ratio stands at 9.9% — suggesting there is dry powder that could be deployed with the right policy framework.

"There are things that could be unleashed with the right set of policies," Marc Ostwald, chief economist at ADM Investor Services International, said. "But I'm not convinced that any of the Labour candidates is going to address the key issues."

The UK is on track for its sixth prime minister in seven years. Each transition has eroded the country's credibility with international investors, pushing borrowing costs higher and crowding out private investment. If Burnham wins the June 18 election and follows through on his pledge to rip up Reeves' fiscal rules, the gilt selloff could accelerate — forcing the next government to choose between its campaign promises and the bond market's demands.

This article is for informational purposes only and does not constitute investment advice.