UK's 30-year yields top 1998 high as political crisis deepens

(May 12): The UK bond market tumbled, driving long-term bond yields back to the highest in nearly three decades, as growing pressure on Prime Minister Keir Starmer to step down renewed concerns about the fragile state of Britain’s finances. Gilts fell across the board, with yields on 30-year bonds rising as much as 12 basis points to 5.80%, the highest since 1998. The pound slid 0.7% to US$1.3517. The worry running through the market is that a new Labour leader would be more left-leaning than Starmer and possibly loosen the fiscal rules that have restrained the current administration. With global inflation pressures already on the rise, investors are sending a loud warning that they will push back against more government borrowing. “The simple reality is that this latest pressure in a now long line of political upheavals merely adds to the view that no matter who is in power, no matter their political leaning, there does not appear to be a credible plan to restore the country’s finances,” said Matt Cairns, the head of fixed income strategy at Rabobank. “Gilts will remain under pressure, regardless of today’s outcome.” In equities, the UK moves were broadly in line with the rest of the global market. The mid-cap FTSE 250 fell 1.1%. Starmer has so far failed to quell a rebellion in his party and more than 70 of Labour’s 403 members of Parliament have called on the prime minister to step aside in the wake of the disastrous election results last week. One widely-touted challenger is Manchester Mayor Andy Burnham, who has criticised the government’s economic approach, claiming the country is “in hock” to bond markets. While Burnham is not an MP and so can’t currently run for leader, investors are nonetheless spooked. Another contender, Angela Rayner, has also called for an urgent change of direction. UK currency and bond traders are no strangers to political upheaval. Starmer is the fourth prime minister in as many years, with the ensuing policy uncertainty denting investor confidence in Europe’s second-biggest economy. The most dramatic example came in 2022 when former prime minister Liz Truss’ mini-budget sparked a crisis that sent the pound to a record low and gilt yields surging. That required a bond-buying intervention from the Bank of England to halt the rout, with Truss ultimately losing her job. Since then, the gilt market has played a major role in UK political discourse. Starmer and Reeves have defined their agenda by a commitment to self-imposed fiscal rules designed to reassure investors they won’t borrow too much. That stance has curbed the government’s capacity to spend as generously on public services as many in the Labour Party would like, fueling discontent among lawmakers.