The British government’s borrowing costs rose on Monday as markets reacted to increasing pressure on Sir Keir Starmer and investors priced in increased political risk and the possibility of a shift towards more left-leaning Labor policies.
The yield on the benchmark 10-year U.K. government bond rose as much as 0.08 percentage points to nearly 4.6 percent, while the 30-year U.K. government bond yield hit its highest level since November. Bond yields are moving inversely to prices, meaning the rise reflects a sell-off in UK government bonds.
The move came after Scottish Labor leader Anas Sarwar publicly called on Starmer to resign, sparking speculation about the prime minister’s future. The returns later gave back some of their gains after senior ministers threw their support behind Starmer.
Foreign exchange markets were more mixed. Sterling rose 0.4 percent against the dollar to 1.36 US dollars, while it slipped 0.26 percent against the euro to 1.14 euros. London’s FTSE 100 ended the session up 0.16 percent.
Investors appeared to be reacting to concerns that Starmer, under pressure from his party, might move toward more interventionist or spending-heavy policies to shore up support among Labor backbenchers. Markets also weighed the prospect of a leadership contest that could boost numbers on the party’s left.
A name increasingly discussed by traders is Angela Rayner, who sits to Starmer’s left. Although Rayner was among senior Labor figures to publicly support the prime minister, her potential ascension has unsettled investors skeptical of a change in fiscal direction. Wes Streeting, who is seen as part of the more centrist wing of the Labor Party, is also seen as a possible contender in a future leadership race.
Kathleen Brooks, research director at XTB, said markets were starting to revalue UK assets. “A political risk premium is once again being built into UK asset prices as investors worry about what a new leader could mean for economic policy,” she said.
The sell-off in UK government bonds also came amid greater volatility in global bond markets following the general election in Japan, with political concerns in the UK seen as the main cause.
Speculation over Starmer’s position intensified further after his communications chief Tim Allan resigned following the departure of chief of staff Morgan McSweeney at the weekend. The unrest has been exacerbated by controversy over the appointment of Lord Mandelson as British ambassador to the United States, despite warnings about his past association with convicted sex offender Jeffrey Epstein.
For now, markets remain tense, with investors watching closely to see whether Labor’s internal tensions will lead to a change in leadership or a change in economic trajectory in the coming weeks.
