UK borrowing costs hit highest since 1998 amid Starmer uncertainty | Economics
Britain’s long-term borrowing costs rose to the highest level in nearly three decades on fears of a change of Labor leadership, then fell as cabinet ministers rallied around Keir Starmer.
The yield on 30-year government bonds (essentially the interest rate) rose 11 basis points to 5.794% on Tuesday morning, its highest level since May 1998, as investors worried about possible changes to Labor’s tax and spending plans.
Yields fell slightly after the Prime Minister said at a cabinet meeting on Tuesday morning that he would not resign and that the process of leadership struggle had not been triggered. Shortly before the meeting, Miatta Fahnbulleh became the first minister to resign since Labor suffered significant losses in last week’s local and devolved elections and called on Starmer to resign.
Starmer said: “Labour has a process to challenge a leader and that has not been triggered yet. The country expects us to continue governing. That’s what I’m doing and that’s what we need to do as a cabinet.”
Following the cabinet meeting, several cabinet ministers, including business secretary Peter Kyle, technology secretary Liz Kendall and housing secretary Steve Reed, told reporters they supported Starmer.
Starmer’s comments and support appear to have brought some calm to the tense financial markets. The 10-year benchmark yield on UK government bonds reached 5.13% earlier in the day and fell below 5.1%, while the 30-year yield fell to 5.76% after reaching its highest level in 28 years at 5.81%.
Meanwhile, sterling fell 0.6% to $1.353 and fell 0.3% against the euro to 86.8 pa euro.
If higher yields can be sustained, the government could increase the cost of borrowing for consumers and businesses. Bond yields in most major economies have been rising this year due to the inflationary impact of the conflict in the Middle East; but England was hit particularly hard.
Investors are weighing the potential impact of a leadership change or prolonged internal unrest in the Labor Party. Two potential leaders to replace Starmer, Angela Rayner and Andy Burnham, have hinted they would like to see higher public spending.
Neil Wilson, investor strategist at Saxo Markets, said: “If this turns into a dogfight we could see a boom in long-term currencies; political, fiscal and inflation-related risks will increase. Markets do not like uncertainty about who will run the government; the fiscal situation is already fragile and if a left-leaning list prioritizes spending the fiscal situation is likely to get worse, making inflation more sticky.”
Mohit Kumar, Jefferies’ chief European economist, said: “A managed exit would be our base case. Any change would likely be negative for the long end of the curve and the currency.” He said he expected expansion between short- and long-term UK borrowing costs and was betting against the pound.
Stocks were also under pressure; The FTSE 100 index fell almost 1%. Bank stocks fell; Barclays was down 4% in early trade, while NatWest and Lloyds were down more than 3%.
Gold yields had already risen this week due to concerns that a rise in energy prices would lead to high inflation. Oil prices rose nearly 1% on Tuesday as U.S.-Israeli talks to end the war against Iran appeared fragile. Brent crude futures rose 2.7 percent to $106 per barrel, while U.S. West Texas Intermediate futures rose 99 cents, or 1 percent, to $99.06 per barrel.
Donald Trump said Monday that the ceasefire with Iran is on “life support,” citing disagreements over various demands including a cessation of hostilities on all fronts, lifting the U.S. naval blockade, resuming Iranian oil sales and compensation for war damages.
Tehran has emphasized its sovereignty over the Strait of Hormuz, through which about a fifth of global oil and liquefied natural gas passes in normal times and where hundreds of tankers and cargo ships are stranded.
Suvro Sarkar, who leads the energy team at DBS Bank in Australia, said: [peace] “The deal looks to be weakening again and if we don’t see a deal by the end of May, then upside risks to oil prices are certainly on the table.”
XTB research director Kathleen Brooks said: “There is already an upward trend in bond yields and UK yields are facing a double whammy of a rise in energy prices and a political crisis. The risk is a bond market meltdown in the UK in the coming days.”
