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UK borrowing costs hit highest since 1998 amid Starmer uncertainty
TL;DR
UK long-term borrowing costs have reached their highest level since 1998, driven by uncertainty surrounding Keir Starmer's leadership. The pound and stocks also fell as over 70 MPs called for Starmer to resign.
Key points
- UK borrowing costs are at their highest since 1998
- Over 70 MPs have called for Keir Starmer to resign
- 30-year government bond yield reached 5.794%
- The pound fell to $1.354 against the dollar
- 10-year gilt yield rose to 5.11%
Mentioned in this story
Keir StarmerLabour Party
Long-term UK borrowing costs have soared to the highest level in nearly three decades while the pound and stocks fell, as investors braced for a potential change of leadership, with cabinet ministers urging Keir Starmer to quit.
Starmer is consulting colleagues before a crunch cabinet meeting on Tuesday morning that comes after ministerial aides quit and more than 70 MPs publicly called for him to go.
With investors worried over chaos and potential changes to the fiscal rigour of Starmer’s government, the yield – effectively the interest rate – on 30-year government bonds jumped 11 basis points to 5.794%, the highest since May 1998.
The benchmark 10-year yield on UK government bonds (known as gilts) also rose 11 basis points to 5.11%, just below the highest levels since 2008 it hit in March amid fears that the Iran war will stoke inflation.
The pound dropped 0.5% to $1.354 and was 0.3% lower against the euro, at 86.8p a euro.
Neil Wilson, an investor strategist at Saxo Markets, said: “We could see a blowout in longer-dated gilts if this turns into a dogfight – political, fiscal and inflationary risks will rise.
“Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile and likely to become worse should a left-leaning ticket prioritise spending; and that this makes inflation stickier.”
Investors are concerned that, if Starmer is forced out of Downing Street, his possible replacements may seek to increase public spending and loosen the government’s fiscal rules. Two potential frontrunners to succeed him, Angela Rayner and Andy Burnham, have hinted that they would like to see higher public spending.
Mohit Kumar, the chief economist for Europe at Jefferies, said: “A managed exit would be our base case scenario. Any replacement would likely be left leaning and be negative for the long end of the curve and the currency.” He added he expected a widening between shorter- and longer-dated UK borrowing costs, and was betting against the pound.
Stocks were also under pressure, with the FTSE 100 index down nearly 1%. Banks fell, with Barclays dropping 4% in early trade, while Natwest and Lloyds slipped more than 3%.
Q&A
What are the current UK borrowing costs and how do they compare historically?
The yield on 30-year government bonds has risen to 5.794%, the highest since May 1998.
Why are UK borrowing costs increasing now?
Investors are concerned about potential changes in leadership and fiscal policies due to over 70 MPs calling for Keir Starmer to resign.
How has the pound reacted to the rise in borrowing costs?
The pound has dropped 0.5% to $1.354 and is 0.3% lower against the euro, at 86.8p a euro.
What impact does the uncertainty around Keir Starmer have on UK financial markets?
The uncertainty has led to a decline in stocks and increased borrowing costs as investors brace for potential leadership changes.
