UK government borrowing costs rose sharply Tuesday, with 10-year gilt yields briefly hitting 5.13% amid uncertainty over Prime Minister Sir Keir Starmer.
UK government borrowing costs jumped on Tuesday, with the benchmark 10-year borrowing rate briefly reaching 5.13%, near levels last seen during the 2008 global financial crisis, as uncertainty over Prime Minister Sir Keir Starmer unsettled investors.
The move matters because higher gilt yields can raise the cost of government borrowing and feed through to parts of the wider economy, including fixed-rate mortgage pricing. The pressure came as markets were already wary that oil prices, pushed above $100 a barrel by the Iran war, could keep inflation elevated and prompt further interest rate increases.
The UK’s main stock index, the FTSE 100, fell 0.5%, with British bank shares among the leading decliners. Sterling also dropped 0.5% against the dollar to $1.35.
Borrowing costs have risen for governments more broadly since the oil-price shock, but the UK has seen elevated rates compared with similarly sized economies. Analysts said investors were focused on whether any change at the top of the Labour Party could bring a looser approach to public spending and government borrowing.
Prime Minister Starmer and Chancellor Rachel Reeves have repeatedly pledged to stick to “iron clad” borrowing rules in an effort to reassure markets that their economic plans are credible. Some Labour MPs on the party’s left, however, have questioned whether the UK’s budget rules are suitable for long-term renewal.
Capital Economics analysts said the UK’s “already fragile fiscal position” meant investors would be alert to signs of fiscal loosening, adding that likely alternatives to Starmer and Reeves would probably not be seen as equally disciplined on public spending.
Anna Macdonald, investment strategy director at Hargreaves Lansdown, said the bond market had been unsettled by the possibility that a different prime minister could change course on borrowing rules. She said that would lead investors, including overseas buyers who account for about 25% to 30% of UK government bond purchases, to demand a higher risk premium.
Government bonds, known in the UK as gilts, are how the state borrows from investors when spending exceeds tax revenue. The yield is the effective interest rate investors demand to lend money. On Tuesday, yields rose across two-, five-, 10- and 30-year gilts, with the 30-year rate hitting 5.80%, its highest level since 1998.
The next test for markets will be whether the government can restore confidence in its fiscal plans while investors continue to price in the combined risks of political uncertainty, higher energy costs and inflation pressure.
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