Britain’s bond market was heavily criticized by Prime Minister Sir Keir Starmer on Tuesday, with 30-year yields rising to their highest level in a century as the prime minister faced a growing group of Labor MPs calling for him to step aside.
The sell-off, which dragged down sterling and shares below Lockstep, erased a rally that followed Starmer’s intervention last week. Tuesday’s Cabinet meeting, where the prime minister again refused to resign, did not resolve anything. Investors are now clearly pricing in the prospect of Labor policy, as well as the inherent risks of looser monetary policy, higher gilt issuance and further reductions in the cost of capital for British businesses.
For 5.5 million small and medium enterprises, the results are far from academic. Long-term gilt yields eat directly into exchange rates that underpin commercial lending, corporate lending and asset finance, raising the prospect of another leg up in borrowing costs facing the backbone of British corporate at a time when many are still nursing a post-pandemic debt legacy.
The 30-year yield rose 13 basis points to 5.81 percent, the highest since May 1998. The 10-year yield gained 10 basis points to 5.1 percent, after breaching a post-2008 high set earlier this month. Bond prices move inversely with earnings.
“A new Labor leader could face pressure to loosen financial rules and release money,” warned Jim Reid, an analyst at Deutsche Bank, citing the City’s deep concern that any successor would rely on higher spending and heavier taxation of the very businesses the Treasury relies on to drive growth.
Sterling’s slide alongside government bonds will draw an uneasy parallel to the dark days of Liz Truss’s micro-budget. If the currency weakens in concert with rising borrowing costs, it is the trading pattern of the emerging market that has lost the confidence of foreign investors, not the G7 economies. The pound fell 0.64 percent against the dollar to a two-week low of $1.352, and shed 0.21 percent against the euro to €1.152, its weakest since mid-April.
Some pressure is undeniably introduced. Bunds, OATs and BTPs all sold off as President Trump announced that the Iran suspension was “based on life support”, causing Brent crude to rise 2.8 percent to $107.17 a barrel and fears of inflation reigning in all advanced economies. The Strait of Hormuz, through which a fifth of the world’s oil and gas once flowed, remains largely closed. Germany’s Dax weighed heavily on European trading, down 1 percent. But gilts have performed below a significant margin, marking Westminster’s political turmoil as Britain’s risk premium.
Mohit Kumar, chief European economist at Jefferies, urged clients to do well, saying any change in government composition was “likely to leave the ground”. Anthony Willis, senior economist at Columbia Threadneedle Investments, warned that the bond market was unlikely to stabilize “until greater clarity emerges”.
Equities followed suit. The FTSE 100 gave up 0.3 percent to open the week with a gain of 0.4 percent, while the domestically-focused FTSE 250 fell 211 points, or 0.9 percent, extending its losses for a second day. Mid-sized stocks, held by UK-focused businesses, read well on the City’s assessment of Britain’s economic prospects.
The grim verdict from Andrew Goodwin, chief UK economist at Oxford Economics, is that there is little prospect of meaningful relief. He expects 10-year borrowing costs to remain stuck above 5 percent for the rest of the year, regardless of who sits at No. 10. “The markets clearly see that the UK has a serious problem of inflation and that a tighter monetary policy will be needed to limit the secondary effects from the energy shock, while political uncertainty has added pressures on the bottom line,” he said.
Even if Starmer were to dig in, Goodwin argued, the bond market would have little to celebrate, with the prime minister’s efforts “to regain popularity, or, possibly, from a successor using more expensive left-wing economic policies” carrying emotional weight. “If Starmer sets a timetable to stand down, the uncertainty premium will continue.”
For owner-managers who are already navigating the basis of punitive costs, a softening consumer and the fallout from this spring’s National Insurance changes, the message from bondholders is unmistakable: borrowing to stay attractive, and political risk to stay strong on the balance sheet.
