UK bond yields off the highs as cabinet ministers offer support
UK government borrowing costs are still elevated as noon approaches, but not quite as high as they were.
Bond yields have dipped back after Keir Starmer told the cabinet he was not resigning.
After that meeting, several cabinet ministers including Peter Kyle, the business secretary, Liz Kendall, the technology secretary, and housing secretary Steve Reed told reporters they were supporting Starmer.
The 30-year bond yield is now up 9 basis points at 5.76%, having hit a new 28-year high of 5.81% this morning (see earlier post).
Ten-year bond yields are off their earlier highs too – up almost 10bps at just below 5.1%, having hit 5.13% earlier today.
Key events
Kalyeena Makortoff
Bank sources are playing down the impact of uncertainty over Starmer’s future, saying that while they wanted stability, they were agnostic about how Labour would get there.
A City source at a UK investment bank told the Guardian that while it was an “unwelcome distraction”, traders seemed “sanguine” about the Labour government turmoil, adding that this kind of instability was not unique to the UK and something they were increasingly used across Europe.
They said bankers believed Labour policies were “unlikely to be that radical” even with a change in leadership.
We are likely to see further gilt and sterling weakness in the coming days, predicts Kit Juckes, foreign exchange expert at French bank Société Générale.
One fear is that the shift of power from PM Starmer to any successor could play out slowly. The PM is resisting internal pressure to resign, for starters.
Greater Manchester Mayor Andy Burnham is the bookmakers’ favourite to replace him but confidence that he could win a by-election (in order to stand for PM) has been damaged by Labour’s poor performance in Local election. Angela Rayner, former Deputy Prime Minister, is still in Parliament but hasn‘t got as wide support as Burnham.
However it plays out, we are in for a period of uncertainty about future Labour policies. Increased spending is a given, and so are higher taxes, almost certainly including higher taxes on wealth and housing.
Layer that on top of geopolitical uncertainty, rising energy costs, and UK 2026 consensus GDP growth forecasts which have fallen from 1.1% at Christmas to 0.8% now, and there isn’t much to make anyone feel good about the pound.
UK bond yields off the highs as cabinet ministers offer support
UK government borrowing costs are still elevated as noon approaches, but not quite as high as they were.
Bond yields have dipped back after Keir Starmer told the cabinet he was not resigning.
After that meeting, several cabinet ministers including Peter Kyle, the business secretary, Liz Kendall, the technology secretary, and housing secretary Steve Reed told reporters they were supporting Starmer.
The 30-year bond yield is now up 9 basis points at 5.76%, having hit a new 28-year high of 5.81% this morning (see earlier post).
Ten-year bond yields are off their earlier highs too – up almost 10bps at just below 5.1%, having hit 5.13% earlier today.
Starmer isn’t the only world leader facing a growth slowdown either.
Over in Moscow, the economy ministry has lowered its estimates for gross domestic product (GDP) growth in 2026 to 0.4% from 1.3% and halved estimated growth in 2027 to 1.4% from 2.8%.
Kremlin spokesman Dmitry Peskov told reporters that president Vladimir Putin was closely involved in economic issues and that Russia could “talk confidently” of macroeconomic stability despite volatility in global markets driven by the conflict in the Middle East.
Peskov added (via Reuters):
“Thanks to the measures being implemented by our government, we can confidently speak about macroeconomic stability and promising plans to modestly, but steadily, increase economic growth rates year after year.”
EY: Global energy supply disruption to slow UK GDP growth
Whether or not Keir Starmer is replaced, the UK faces a major energy shock from the Iran war.
A new economic outlook released by consultancy EY predicts that UK growth will be hit hard by higher oil and gas prices this year.
EY’s modelling suggests that before the Middle East conflict, UK GDP was on track for 1.3% growth in 2026. However, that has now been lowered to 0.8%, in a scenario where the strait of Hormuz reopens by the middle of 2026
But if there is an escalation and the Strait remains closed until the end of 2026, UK GDP growth could fall to 0.3% this year, EY warns.
EY also predicts the UK unemployment rate will increase slightly to 5.8% by the end of 2026 as weaker growth impacts hiring levels, before falling back to 5.2% in 2028.
Lucy Smith, senior investment manager at Killik & Co, warns that UK bond yields could rise higher, as investors fear political change and a burst of extra government spending:
“Gilt yields continue to creep up as Starmer’s premiership appears to weaken. Right now, it is hard to say whether a swift and decisive swap to a new leader or a longer-term contest will generate more uncertainty, and by extension, higher borrowing costs. Either way, the mere prospect of change, in part driven by an underlying fear that we could return to an era of successive leadership changes, is enough for investors to lose confidence.
A change in Labour leadership will mean six prime ministers in seven years, a clear signal of political instability, which is precisely what bond investors seek to avoid. Expectations of a drift to the left wing of the Labour party, which could result in a tax-and-spend strategy, could well drive yields up further as the market questions the Government’s ability to pay back the debt in the long-term.”
Labour must offer more than ‘better managed decline’ on economy, MPs urge
Richard Partington
An influential group of MPs has said that Labour needs an urgent renewal of economic strategy to offer voters “more than better management of decline” before the next general election.
With Keir Starmer fighting to ward off a leadership challenge, the leading backbenchers from the soft-left Tribune group published a series of essays calling for bolder action to salvage its remaining time in power.
In a foreword by the former cabinet minister Louise Haigh, and Yuan Yang, a prominent figure from Labour’s 2024 intake, the MPs issued a thinly disguised attack on Starmer amid pressure on him to set out a timeline for his departure.
The MPs wrote:
“We do not present this as the final word. They are an invitation – to challenge assumptions, test ideas, and help build a broader coalition for economic renewal. Because the economic status quo is no longer defensible.”
“And if politics is to regain trust, it must offer more than better management of decline.”
30-year bond yield now over 5.8%, as Starmer says he’s not resigning
UK borrowing costs are hitting new highs during morning bond market trading.
The 30-year UK gilt yield has now nudged 5.81%, and is still trading above the 5.8% mark after Keir Starmer told his cabinet colleagues he is not leaving.
Our political editor Pippa Crerar reported a few minutes ago, on X:
BREAKING: Keir Starmer tells his cabinet this morning that he’s staying put.
“As I said yesterday, I take responsibility for these election results and I take responsibility for delivering the change we promised.
“The past 48 hours have been destabilising for government and that has a real economic cost for our country and for families.
“The Labour Party has a process for challenging a leader and that has not been triggered.
“The country expects us to get on with governing. That is what I am doing and what we must do as a Cabinet.”
Those economic costs are continuing to mount, with the 30-year bond yield now up 13bps (0.13 of a percentage point) at 5.803%.
That indicates investors remain deeply concerned about UK political turmoil.
XTB: Risk of UK bond market meltdown
The political turmoil in the UK has hit at a bad time for the bond market, points out Kathleen Brooks, research director at XTB.
That’s because the jump in oil prices is creating inflation risks, which pushes up government bond yields.
Brooks explains:
There is an upward bias for bond yields anyway, and the UK yields are facing a double whammy of an energy price spike and a political crisis. The risk is that we get a bond market meltdown in the UK in the coming days. If that happens, will it quiet the factions of the Labour party who have threatened to ignore the bond market, ditch fiscal rules and boost public spending even more?
In the past, Rachel Reeves has been seen as vital to the stability of the UK’s bond market because she introduced the ‘iron clad fiscal rules’ to bring down the UK’s debt levels and finance day-to-day spending with tax take.
If this is a drawn-out leadership battle, or if Starmer lays out a timetable to leave in the coming months, both Starmer and Reeves will be seen as lame ducks who have no control over the public purse. This would be a bad position for the UK to find itself in, especially since our last election was less than 2 years ago. Right now, it’s hard to see how the bond market can stabilize, and there could be further downside ahead.
Financial markets are pricing in a move to left under a new prime minister, reports Ruth Gregory, deputy chief UK economist at Capital Economics:
In short, a shift to the political left is likely to lead to looser fiscal policy, higher gilt yields and a lower pound than otherwise, but we doubt a new Prime Minister would be any more successful at boosting the economy’s medium-term growth rate.
With 10-year gilt yields up by 10bps this morning and the pound down by 0.4% against the euro, which comes after similar moves yesterday, this is already playing out in the financial markets.
The pound’s sell-off is gathering pace.
Sterling is now down almost one cent against the US dollar at $1.3511 (a one-week low).
The pound has also dropped against the euro, down half a eurocent to below €1.15 (a near three-week low).
