A critical speech by UK Prime Minister Keir Starmer on Monday, intended to shore up his leadership, instead triggered a sell-off in government bonds that pushed borrowing costs to their highest levels in decades and revealed deep investor anxiety over the country's political stability.
“Keir Starmer’s address to the nation hasn’t done the trick of calming bond markets,” said Susannah Streeter, chief investment strategist at Wealth Club. “There is still a sense of jitters playing out as concerns about political instability collide with inflationary fears prompted by the ongoing conflict in the Middle East.”
The yield on 30-year UK government bonds climbed by 9 basis points to 5.67 percent, while the benchmark 10-year yield rose 8 basis points to breach the 5 percent mark. The moves, which represent a fall in bond prices, signal a reduced appetite for UK debt and stand in contrast to the currency market, where the pound held steady against the euro at €1.156 and was little changed against the dollar at $1.361.
The market turmoil underscores the high stakes for Starmer, whose premiership is under mounting pressure following heavy local election losses. Investors fear that a successful challenge from the left of the Labour party could lead to a significant policy shift. “A potential lurch to the left is what markets fear most, as this could mean higher taxes, heavier gilt issuance and a broader fiscal risk premium baked into UK assets,” said Enrique Díaz-Alvarez, chief economist at Ebury.
Leadership Fears Drive Yields Higher
In his speech, Starmer vowed to fight on, stating "I will not walk away," and attempted to set a new policy agenda by confirming the government would legislate to fully nationalize British Steel and seek to rebuild relations with the European Union. However, these announcements were overshadowed by the political drama.
The moves were compounded by several Labour MPs, including Catherine West, publicly calling for Starmer to set a timetable for his departure. The potential for a leadership contest involving figures like Angela Rayner, who has been critical of the current policy direction, is creating the uncertainty that bond markets dislike.
“Investors are betting that Labour’s overwhelming defeat will not end Starmer’s premiership just yet, but pressure on the prime minister looks set to intensify,” Díaz-Alvarez added.
Some analysts, however, believe the market reaction is contained for now. "The relatively mild reaction in the bond market... suggests that traders do not believe that the threat to Keir Starmer will materialise," noted Kathleen Brooks, research director at XTB, arguing that a "bigger blow" would be needed to send yields significantly higher.
The current yields, not seen for a sustained period since the late 1990s, reflect a fundamental shift for investors. "The opportunity in credit is largely yield-led rather than spread-led," according to Matthew Rees, head of global unconstrained fixed income at L&G. He argues that while spreads are tight, the high absolute yields on offer are attracting capital, providing a supportive technical backdrop for fixed income even as political risks rise.
This article is for informational purposes only and does not constitute investment advice.
