Britain’s long-term government borrowing costs came under renewed pressure amid fresh concerns over political instability, which unsettled bond markets and weakened the pound. The yield on 30-year UK government bonds, known as gilts, surged 12 basis points to 5.774% in Friday morning trading, nearing the 28-year highs seen earlier this week. This surge coincided with Prime Minister Sir Keir Starmer facing a growing threat of a leadership challenge.
Similarly, 10-year gilts experienced another sell-off, with yields climbing 11 basis points to 5.104%, well above 5%. A rise in gilt yields indicates a fall in bond prices, translating to higher borrowing costs for the government in financial markets. Meanwhile, the pound depreciated against the US dollar, initially falling by 0.4% before stabilizing around 0.3% lower at 1.336 US dollars.
Beyond political unease, broader inflation concerns, exacerbated by the ongoing Iran war, contributed to a sharp decline in London’s blue-chip share index. The FTSE 100 Index dropped 0.8% to 10288.7 in early trading on Friday. Oil prices also increased by 2%, surpassing 107 US dollars a barrel, as a resolution to the US-Israel conflict in Iran remained elusive.
Chris Beauchamp, chief market analyst at IG, noted that bond markets were anxious about the prospect of a more left-leaning government leader. This follows Greater Manchester Mayor Andy Burnham being presented with an opportunity to return to Parliament after a Labour MP stepped down. The political landscape has also been shaped by Wes Streeting’s resignation as health secretary on Thursday and former deputy prime minister Angela Rayner’s cleared tax affairs, paving the way for a potential leadership bid.
Mr. Beauchamp commented that while Andy Burnham’s “long quest” for a parliamentary return has succeeded, the possibility of the “King in the North’s” ascent has negatively impacted UK borrowing costs. He added, “Worries about higher spending commitments have seen investors take flight from UK bonds. For a UK economy already facing a potential energy crisis, sapping growth, the rise in yields is particularly grim news.”
Susannah Streeter, chief investment strategist at Wealth Club, highlighted that Burnham’s primary challenge is winning the upcoming by-election, suggesting a potentially “long and cumbersome” leadership contest. She concluded, “Another bout of political infighting, with yet another Prime Ministerial shuffle under way is hardly a good look for a country which needs to portray stability to attract investment.”
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