Downing Street resignations trigger bond market jitters
Nervousness rippled through UK bond markets on Monday after a series of Downing Street resignations concentrated minds on the uncertain future of prime minister Sir Keir Starmer.
The 10-year gilt yield – a key benchmark for the government – rose as much as 10 basis points to 4.62 per cent following news that Scottish Labour leader Anas Sarwar would give a speech calling for Starmer to quit.
That came shortly after the resignation of Downing Street communications chief Tim Allan, the second such departure of a close Starmer aide in 24 hours following the exit of chief of staff Morgan McSweeney on Sunday. So far, no Labour cabinet ministers have openly called for Starmer to step down.
The bond market move, which is more than double the average daily gilt yield move of around four basis points, means 10-year yields have topped last week’s peak of 4.6 per cent to hit a four-month high. But market reaction remains more muted than on other days of political calamity, such as when Chancellor Rachel Reeves was spotted sobbing in the House of Commons last July, which sparked a 16 basis point surge.
Kathleen Brooks, research director at XTB, said: “This is likely to be an unsettling time for UK bond investors, as any successor could push UK economic policy further to the left, which may trigger a selloff in UK debt. In the past month, a political risk premium has been added to UK long-end debt, and the 10-year Gilt is the worst performer in Europe and is underperforming the US.”
Starmer has been feeling the heat of renewed pressure following the departure of his chief of staff and right-hand-man Morgan McSweeney.
McSweeney fell on his sword for appointing Peter Mandelson to the post of US ambassador – a move which has faced intensified scrutiny after the latest drop of Epstein files unveiled close ties between the Labour veteran and the convicted sex offender, including signs Mandelson shared market-sensitive data with Epstein while he served as business secretary.
He said advising Starmer to name Mandelson as ambassador was “wrong” and he took “full responsibility”.
It follows Starmer backing McSweeney just days prior at Prime Minister’s Questions, where the Labour leader said “of course” he had full confidence in his top adviser.
In a statement on Monday Allan said: “I have decided to stand down to allow a new No10 team to be built. I wish the PM and his team every success.”
Yield curve in focus
Over the last week, nerves have engulfed the bond market in a sign investors were betting against the stability of the Starmer government.
The gulf in price between the UK’s short- and long-term debt – known as the yield curve – reached its highest since 2018 last Thursday, in a sign investors were losing faith in the long-term credibility of the UK economy even as the interest rate outlook improved.
Borrowing costs for the 10-year gilt remained elevated last week as trades braced for the idea of a new leader from the left with looser fiscal discipline, pushing up government borrowing further. The sell-off on Thursday widened the gap between the two- and 10-year bonds to over 95 basis points, its highest in nearly eight years.
However, bond yields remain below their 2025 peak of around 4.9 per cent.
Starmer allies have pushed back against the idea of a regime change.
On Sunday, work and pensions secretary and close Starmer-ally Pat McFadden rejected calls for a no-confidence vote.
He told the BBC’s Sunday with Laura Kuenssberg programme: “Maybe one way we can be different is to not drop the pilot after 18 months and to stick with a leader and have consistency in leadership.”