UK borrowing costs waver as Starmer insists he will not ‘walk away’
Government borrowing costs – which are reflected in changes in gilt yields – have edged lower as City traders were calmed by Sir Keir Starmer’s insistence that he would not “walk away”.
Gilts were the best performing government bonds out of any G7 nation on Friday morning as 10-year yields dropped by around eight basis points, though analysts have said investors are waiting for further results to take a full judgment on political risks.
UK bond traders were on high alert in the lead-up to local election results, with 30-year yields climbing to a high not seen since 1998.
The 30-year gilt yield dropped by 0.1 percentage point on Friday despite initially edging higher. Ten-year gilt yields fell by eight basis points.
Despite sour elections results for Labour across the country as it lost control of councils across the Red Wall near Manchester and gave away seats in London, traders have given the UK government some of the benefit of the doubt as Starmer hopes to cling on to his premiership and keep fiscal rules intact.
Neil Wilson, a UK strategist at the bank Saxo, said there was a chance the “political scene goes a bit woo-woo”, with bond vigilantes ready to pounce on any manoeuvre from Starmer’s challengers.
“We hit 28-year highs on the 30-year earlier this week and the bond vigilantes are lurking,” he said.
“Political risks associated with a Starmer or Rachel Reeves defenestration are bound up with already rising fiscal and inflationary risks for the UK economy.”
He added that a drop in gilt yields reflected some traders’ feelings that the outcome of the election were slightly better than a “worst case doomsday scenario”.
Starmer ‘takes responsibility’
Aj Bell’s head of markets Dan Coatsworth said gilt yields remained at “elevated levels” after changes earlier this week.
ING strategist Francesco Pesole meanwhile suggested that some gains from Reform UK were seen as a “less problematic scenario” for gilts.
By midday on Friday, Labour had lost more than 250 seats while Reform UK gained nearly 400 seats across the country. Results in Wales and in parts of London were expected to be more concerning for the party. Around a third of council election results had been declared.
In a market-moving public appearance, Starmer admitted that the party had made “unnecessary mistakes” while in government, referencing Labour’s early days where ministers complained about the state of public finances and claimed the economic outlook was gloomy.
He said poor results were “tough” but added that “days like this don’t weaken my resolve to deliver the change that I promised”.
“The results are tough, they are very tough, and there’s no sugarcoating it,” Starmer said.
“We have lost brilliant Labour representatives across the country, these are people who put so much into their communities, so much into our party.
“And that hurts, and it should hurt, and I take responsibility.”
Markets are monitoring the prospect of challenges to Starmer’s leadership from senior Labour figures including former deputy prime minister Angela Rayner, health secretary Wes Streeting and Manchester mayor Andy Burnham. None of those figures spoke out about the results on Friday morning.
Justice secretary David Lammy said the party should not “pass the parcel” with the leadership while defence secretary John Healey said Starmer could “still turn it round”.
Reform UK leader Nigel Farage said the results represented a “complete reshaping of British politics in every way”.