UK borrowing costs rise after departure of two key Keir Starmer aides | Stock markets
Britain’s borrowing costs rose on Monday as investors watched for signs of unease in markets over Keir Starmer’s future.
The yield, or interest rate, on UK benchmark bonds rose on Sunday as investors reacted to the resignation of the prime minister’s chief of staff, Morgan McSweeney, over her decision to appoint Peter Mandelson as ambassador to Washington.
Yields rose further after Downing Street communications director Tim Allan resigned on Monday morning.
With opposition leader Kemi Badenoch saying Starmer’s position was “untenable” following McSweeney’s departure and Green Party leader Zack Polanski admitting he should resign, the City of London was weighing the prime minister’s chances of survival and assessing the impact of any possible changes on the public finances and the economy.
The yield on 10-year UK government debt rose 4 basis points (0.04 percentage points), while 30-year bond yields were 4.5 basis points higher; both reached levels seen late last week. When bond prices fall, yields rise and indicate the rates at which investors are willing to lend money to the government.
Sterling fell as much as half a euro cent against the euro to 1.1460 euros, its lowest level in more than two weeks, but was slightly higher against the US dollar at lunch.
“The movement between government bonds and the currency shows there is no panic in financial markets about the stability of the UK government,” said AJ Bell investment director Russ Mould.
Potential candidates to replace Starmer will be more left-leaning; this means higher spending and less focus on complying with the UK’s fiscal rules; This will generally be negative for UK government bonds and sterling.
Former deputy prime minister Angela Rayner could take over more taxes and spending Greater Manchester mayor Andy Burnham said England should stop being “hostage” to bond markets.
City consultancy Capital Economics believes that if Starmer or chancellor Rachel Reeves were replaced, gilt yields would likely rise while sterling would weaken.
“The most likely long-term impact is an easing in fiscal policy that would otherwise lead to higher yields and a weaker pound sterling,” said Ruth Gregory, deputy head of UK economist at Capital Economics.
Sterling rose against the US dollar in January but has fallen so far this month.
Neil Wilson, an investor strategist at Saxo UK, suggested the pound could face further pressure “if the PM police gets more angry about his appointment of Peter Mandelson as Britain’s ambassador to the US”. UK government bonds may also be vulnerable.
“Over the weekend, Starmer’s chief of staff Morgan McSweeney resigned and took responsibility for advising the Prime Minister to appoint Mandelson. Far from drawing a line under things, this appears to have sparked fresh calls for Starmer to do the same.”
“The Gilts were stable enough on Monday morning, but if the bond vigilantes were to smell the possibility of a leadership change, I would expect the Gilts to sell along with the pound, an indication of investor sentiment towards political uncertainty and instability in the UK,” Wilson warned.
