UK 10-year government bond yields hit 5.13% yesterday, the highest level since 2008, reflecting intense political pressure on Keir Starmer and rising investor concerns.
While uncertainty about the Labour leader’s future unsettles markets, it is not the only factor: the war in the Middle East has caused energy prices to soar, fueling inflation and making gilts the most penalized among major advanced economies.
Between domestic politics and global shocks, the United Kingdom faces a moment of particular financial fragility.
Storm over Downing Street
Keir Starmer’s leadership hangs by a thread. After Labour’s heavy defeat in local elections, over 70 Labour MPs have called for his resignation.
As reported by CNBC, Starmer reiterated during a cabinet meeting that he has no intention of stepping down, but internal discontent is palpable. The prime minister, who came to power in July 2024 with a crushing majority, is paying the price for stagnant growth and the cost-of-living crisis inherited from the pandemic and wars.
As the New York Times observes, the bond market is sending a clear signal: it supports the current Starmer-Reeves duo for their fiscal discipline but fears a shift towards more expansionary policies.
Chancellor Rachel Reeves has repeatedly promised “ironclad” budget rules, yet a portion of the Labour left considers them inadequate for long-term challenges.
Rising yields
While 10-year gilt yields have reached 5.13%, 30-year yields have neared 5.81%, the highest level since 1998.
As highlighted by the BBC, the increase has been more pronounced compared to France and Germany. Investors are demanding a higher risk premium in the face of political instability.
Gordon Shannon of TwentyFour, quoted by Reuters, points out that most of Starmer’s potential successors – perhaps except Wes Streeting – would like to increase public spending and borrowing. Andy Burnham, for example, could push for an additional £50 billion over five years by exempting defense from current constraints.
Memories of Liz Truss’s mini-crisis in 2022, when markets harshly punished sudden tax cuts, are still fresh and make investors particularly nervous.
According to Capital Economics analysis cited by the BBC, a leadership change towards more left-wing figures like Angela Rayner or Andy Burnham risks loosening budget discipline, with negative effects on growth, rates, and the country’s attractiveness to foreign capital, which accounts for 25-30% of gilt buyers.
The role of the war in Iran
Instability in Westminster does not explain everything. As Reuters highlights, the Gulf conflict has pushed oil and gas prices up by about 50% since late February, driving inflation. The Bank of England now expects inflation to exceed 6% early next year, against a 2% target.
The UK, a net gas importer, is particularly exposed. This energy shock has reversed rate expectations: markets now price in a possible Bank of England base rate hike to 4.5% by 2027, instead of the cuts forecast before the war.
The New York Times notes that yields were already rising before the political crisis, precisely due to these factors.
Gilts yield more: consequences
UK 10-year yields significantly exceed those of the US (4.45%) and Germany (3.10%).
As Reuters explains quoting Alexandra Ivanova of Invesco, gilts incorporate higher risk premiums on liquidity, politics, duration, and especially inflation.
Each percentage point increase in yields will cost the government about £15 billion more per year in debt interest by 2030, according to the UK budget office.
The pound has lost ground, falling 0.5% to $1.35, while the stock market closed slightly down. Banks have suffered particularly due to fears of future fiscal tightening or tax increases.
