UK government borrowing costs surge as PM Starmer pressured to quit

Yields on U.K. government bonds surged to multi-decade highs on Tuesday morning, as pressure mounted on Prime Minister Keir Starmer to resign from his post.

By 10:20 a.m. in London, the yield on the benchmark 10-year gilt had jumped 12 basis points to trade at around 5.121%. Bond yields and prices move in opposite directions.

Meanwhile, yields at the long end of the curve reached their highest since 1998, with the 20-year gilt yield adding 13 basis points while 30-year yields jumped 12 basis points higher.

Starmer’s leadership is on a knife edge after more than 70 Labour lawmakers called for his resignation.

The calls for Starmer to resign came after the Labour Party suffered major losses in local council elections last week.

While the election result will not change the composition of Britain’s parliament or its government, some lawmakers have argued the outcome was a protest from the electorate against Starmer’s policy mix.

The prime minister held a routine meeting with his cabinet on Tuesday morning. According to the U.K.’s Guardian newspaper, Starmer told cabinet members that he will not step down, reiterating the position he set out in the aftermath of Thursday’s elections.

Labour has a process for challenging a leader and “that has not been triggered,” he reportedly said. “The country expects us to get on with governing. That is what I am doing and what we must do as a cabinet.”

Without Starmer’s resignation, a Labour leadership challenge — which would determine Starmer’s fate as leader of the governing party — can only be triggered if 20% of Labour MPs back a challenger. Currently, that means 81 Labour MPs would need to back a potential replacement.

Growth and living standards have stagnated in the U.K. in recent years, with the country facing a cost-of-living crisis in the wake of the Covid pandemic and the Russia-Ukraine conflict.

Starmer’s Labour Party has faced growing public anger at the slow pace of economic reforms, with Thursday’s vote seeing huge gains for the right-wing Reform UK and the left-wing Green Party.

But bond vigilantes have largely been supportive of Starmer and Reeves retaining their positions relative to potential alternatives, with U.K. bonds selling off in previous bouts of uncertainty over their political futures.

Last July, yields on gilts surged after Reeves was seen crying in parliament, amid reports that her role in Starmer’s cabinet was in jeopardy. It came after the government U-turned on her proposed welfare cuts following a rebellion from Labour politicians.

Health Minister Wes Streeting, former Deputy Prime Minister Angela Rayner and Greater Manchester Mayor Andy Burnham are reported to be among the top contenders to replace Starmer. Rayner and Burnham — who is currently ineligible to stand as prime minister because he lacks a seat in parliament — are broadly considered more left-leaning than Starmer.

Matthew Ryan, head of market strategy at financial services firm Ebury, said in a Tuesday morning note that bond markets were delivering their verdict on the situation unfolding in Westminster, “and it isn’t pretty.”

“The bond vigilantes are out in full force, with long-dated yields leaping to near three-decade highs,” he said. “Investors are attaching a distinct political risk premium to U.K. assets, fearful of both a change in the status quo and a surge in gilt issuance under a more left-leaning prime minister.”

Jordan Rochester, head of FICC strategy for the EMEA region at Mizuho Bank, labeled the political tensions “Starmer drama” in a Tuesday note — but he said the prime minister could hold onto his position for some time to come.

“Starmer could yet survive into 2027, Boris [Johnson] clung on for much longer than some expected at the time,” he said. “But momentum is shifting against Starmer, this looks more like the Theresa May example where she resigned within weeks of poor local elections in 2019. For many the writing is on the wall at this stage, it’s just a matter of how quickly the exit happens.”

Starmer is the U.K.’s sixth prime minister to take office in the past decade, with the roster during that time including predecessors May and Johnson — both of whom resigned before their terms ended after pressure from lawmakers.

In a note on Monday evening London time, strategists at Citi said the market impact of removing Starmer from office could move beyond higher government borrowing costs.

Recent developments had set the stage for a leadership challenge, Citi’s team said, which could trigger “a leftwards shift in Labour policies and more expansionary fiscal policy.”

“We foresee risks skewing towards higher Gilt yields and a weaker GBP,” they said, adding that this would also negatively impact domestic-focused FTSE 250 companies but could benefit internationally exposed FTSE 100 constituents.

But they warned that, in their view, current gilt yields do not fully price in an immediate leadership challenge.

“A credible challenge could trigger a bear-steepening in yields, leading to heightened volatility and potentially pushing 10-year Gilt yields to 5% to 5.25% or higher,” they said.