UK government borrowing costs hit 28-year high on leadership uncertainty
UK long-term borrowing costs have surged to a fresh 28-year high and the pound weakened as Prime Minister Sir Keir Starmer’s leadership comes under increasing pressure.
The yield on 30-year UK government bonds – also known as gilts – jumped as much as 13 basis points to 5.807% in Tuesday morning trading, reaching the highest level since 1998 as Sir Keir faced increasing calls from within his own party to quit.
The yield on 10-year gilts also rose back above 5%, lifting by 11 basis points to 5.11%, but remains below recent highs reported last month.
Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.
Rising yields on these bonds mean it costs more for governments to borrow from financial markets.
The pound also weakened further amid the UK political instability while stocks on the London market dropped sharply on rising oil prices as the US remained in deadlock with Iran over a resolution to end the conflict.
Sterling fell 0.6% to 1.352 US dollars and was 0.2% lower at 1.152 euros.
The FTSE 100 Index dropped more than 1% in opening trade, later settling 0.5% lower at 10216.15
The cost of crude continued to edge back up, standing 2% higher at just over 106 dollars a barrel.
Neil Wilson, Saxo UK’s investor strategist, warned over further market volatility and a mounting gilt rout until leadership clarity is achieved.
He said: “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.”
He added: “A leftwards lurch would raise hackles among bond vigilantes at a time when the fiscal position is already fragile, and risks are rising due to rising inflation from soaring energy prices and weaker growth outlook for the economy.
“In the event of a new leadership ticket there is a risk of additional government spending on cost-of-living measures, such as support for rising energy bills, increased minimum wage, benefit uprating and a rental freeze, among a range of potential help mechanisms.
“It would be a toxic combination for gilts – higher spending, lower growth and inflation becoming embedded.”
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Thanks in part to a lot of the press that have been gunning for labour since they won.
Daily mail and telegraph don’t care about peoples finances, only their own
They may regret their actions if it triggers an IMF bailout that forces the UK to rejoin the single market and reform pensions, and the right get blamed for it.
There is zero risk of this happening – firstly the IMF bailout, secondly the Uk joining the single market
Is that wishful thinking or can you see the future? Just the thought of a leadership election spiked borrowing costs. What happens with an actual leadership election, and what happens if the markets don’t like PM Rayner’s Big Socialist Plan? If borrowing becomes unaffordable debt spirals out of control. Only the IMF can stabilise that. And they will want Greek style haircuts for everyone or a return to the single market.
The owners of both are “speaking for Britain” whilst living overseas. Springer (the Telegraph new owner) is German. Rothermere/Harmsworth is a tax-exile living in Monaco.
I can’t stress how disastrous this is. We are already heading to high inflation due to the Iran war – which hits in 3-6 months time.
However, we are now cursed with higher government borrowing costs (currently £111 billion per year) and larger interest payments (loans, mortgages) due to political instability. People coming off covid mortgages are going to be spending 2-2.5x more on mortgage payments.
For sure, there is going to be pressure for significant public spending cuts or tax rises. Vicious circle, which will last for 3-4 years
State pensions top of the list. The £40bn hike since 2021 is completely unsustainable.