‘Clear risk signal’: Gilt yields hit 28-year high as investors weigh Starmer’s future after local elections
Gilt yields have risen to their highest rate since 1998 as investors weigh the odds of Keir Starmer being ousted following what is widely expected to be a major defeat for Labour at the local elections.
The yield on 30-year government bonds rose 11 basis points on Tuesday to hit 5.76 per cent, topping the 27-year high suffered by the government late last year.
UK government borrowing costs have already been hit hard by developments in the Middle East, with the UK suffering the biggest growth downgrade following the outbreak of war in Iran.
But shaky investor sentiment over the UK’s prospects has been compounded by growing fears of Starmer’s defenestration after the local elections, with a potential replacement being recruited from the left of the Labour party with a looser approach to fiscal discipline. Health Secretary Wes Streeting, former Deputy Prime Minister Angela Rayner and Manchester Mayor Andy Burnham are viewed as the most likely candidates.
Recent reports suggest backbench MPs are preparing to submit letters of no confidence to Starmer in the event of a wipeout in the local polls.
Mohamed El-Erian, the former boss of fixed income giant Pimco, said yesterday “I am concerned for the health of the UK economy,” adding: “The yield on the 10-year gilt has climbed 12 basis points today (see the CNBC chart below), decoupling from both oil prices and yields in other advanced economies – both of which are currently lower.”
Gilt market Liz Truss memories
“Markets have long memories, and in the UK gilt market that memory is dominated by Liz Truss,” said DeVere group chief executive Nigel Green.
“The 2022 mini-Budget crisis is still the benchmark for what happens when fiscal credibility is questioned. Yields surged, long-dated gilts were hit hardest, and the Bank of England was forced into emergency action to stabilise the system. Investors are watching current political developments through that exact same lens.
“The combination of a potentially massive electoral setback, an organised push against Starmer, and questions over how firmly Reeves can hold the fiscal line creates a clear risk signal for UK bond markets. If those pressures build after the vote, gilt investors will move quickly, pricing in higher borrowing, demanding greater compensation for risk, and pushing yields higher in a way the UK can ill afford.”
10-year gilts were also up by 12 basis points to 5.09 per cent, the highest level seen since late March, while 5-year gilts rose 11 basis points, to 4.61 per cent.
The rising borrowing costs pile further pressure on Rachel Reeves, chipping away at the fiscal headroom laid out by the Chancellor at the latest Budget and making it harder to meet fiscal rules.