UK borrowing costs hit highest since 1998 amid Starmer uncertainty

"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."

"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."

"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 agains"

Long-term UK borrowing costs rose to the highest level in nearly three decades, with the pound and stocks falling as investors prepared for possible changes in government leadership. The yield on 30-year government bonds increased 11 basis points to 5.794%, the highest since May 1998, while the 10-year gilt yield rose 11 basis points to 5.11%. The pound fell 0.5% to $1.354 and declined 0.3% versus the euro to 86.8p. Investors cited concerns about political uncertainty, a fragile fiscal position, and the risk that a left-leaning leadership change could prioritize spending and loosen fiscal rules, making inflation stickier. Analysts expected wider gaps between short- and long-dated borrowing costs and negative effects on the currency and long-end yields.

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