Long-term UK borrowing costs have climbed to their highest levels since 1998, while the pound and stock markets declined sharply. Investors are reacting to mounting pressure on Prime Minister Keir Starmer, with cabinet ministers calling for his resignation ahead of a critical cabinet meeting.
Bond Yields Surge on Fiscal Concerns
The yield on 30-year government bonds rose 11 basis points to 5.794%, marking the highest since May 1998. The 10-year gilt yield also increased by 11 basis points to 5.11%, approaching peaks last seen in 2008 during March’s inflation worries linked to the Iran conflict.
The pound fell 0.5% to $1.354 and dropped 0.3% against the euro to 86.8 pence. FTSE 100 stocks slid nearly 1%, with banks hit hardest: Barclays tumbled 4%, while NatWest and Lloyds each lost over 3% in early trading.
Political Chaos Fuels Market Jitters
Starmer faces intensifying challenges, consulting colleagues before Tuesday’s cabinet meeting following resignations from ministerial aides and public demands from more than 70 MPs for his departure. Investors fear ongoing instability could erode fiscal discipline.
Neil Wilson, investor strategist at Saxo Markets, warned: “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.”
Potential successors like Angela Rayner and Andy Burnham have signaled support for increased public spending, raising concerns about relaxed fiscal rules. Mohit Kumar, chief Europe economist at Jefferies, noted: “A managed exit would be our base case scenario. Any replacement would likely be left leaning and be negative for the long end of the curve and the currency.” He anticipates wider spreads between short- and long-term yields and is positioning against the pound.
Energy Prices Add Inflation Pressure
Gilt yields have already increased this week due to rising energy costs and inflation risks. Oil prices gained ground Tuesday as US-Israel-Iran ceasefire talks faltered. Brent crude futures surged 2.7% to $106 per barrel, while US West Texas Intermediate rose 1% to $99.06 per barrel.
Former US President Donald Trump stated Monday that the ceasefire with Iran remains “on life support,” citing disputes over halting hostilities, lifting the US naval blockade, resuming Iranian oil exports, and war damage compensation. Tehran reaffirmed its control over the Strait of Hormuz, a key chokepoint for one-fifth of global oil and LNG flows, where numerous tankers stay stranded.
Suvro Sarkar, head of energy research at DBS Bank in Australia, observed: “Optimism regarding an imminent [peace] deal seems to be fading again and if we don’t see a deal by the end of May, then upside risks for oil prices are definitely on the table.”
