Government borrowing costs have remained steady amid the ongoing political turmoil surrounding Keir Starmer’s leadership. The focus has shifted to bond markets due to the UK’s heavy reliance on debt, with borrowing costs already elevated compared to other advanced economies due to past crises and investor concerns about inflation.
Following the recent King’s Speech, the yield on both short and long-term Treasury gilts initially dropped before showing a slight increase. As of Wednesday lunchtime, the yield on 10-year gilts was at 5.09%, while for 30-year gilts, it stood at 5.76%. This increase in gilt yields is much lower than the 0.30% spike seen after Liz Truss’s failed mini budget in 2022.
There are apprehensions that a leadership change could drive gilt yields even higher, affecting millions of individuals and their finances, particularly in the realm of fixed-rate home loans based on swap rates influenced by gilt yields and expectations for the Bank of England’s base rate.
According to insights from the Financial Times involving 10 fund managers, the potential replacement of Keir Starmer by Andy Burnham could pose the greatest risk of further gilt yield escalation. Conversely, Health Secretary Wes Streeting was viewed as the least risky alternative, with reports hinting at his possible resignation soon.
Economist Paul Johnson, the former head of the Institute for Fiscal Studies, emphasized the significant impact of political instability on government debt costs and overall spending. The uncertainty surrounding a new leader’s fiscal prudence, economic focus, and alignment with party agendas contributes to market concerns and increased costs.
The deVere Group’s chief cautioned that a cabinet resignation followed by a leadership contest, especially if Streeting resigns and challenges for leadership, could trigger a crisis for gilts and the pound. Market aversion to uncertainty and political disarray could amplify investor doubts about the country’s fiscal trajectory.
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