UK gilt yields fall and pound rises after Starmer vows to stay despite Labour's heavy local election losses
The yield on benchmark UK 10-year gilts fell 5 basis points to 4.89% and 30-year yields dropped 7 basis points to 5.56% on Friday, both outperforming US Treasuries, after Prime Minister Keir Starmer said he would not resign despite Labour losing hundreds of English council seats. The pound gained three-quarters of a cent against the dollar and edged up against the euro as investors concluded the immediate threat of a leadership challenge had eased and Labour's losses came in below election experts' forecasts. Matthew Ryan of Ebury said markets had been pricing in higher spending and tax under a more leftwing successor such as Angela Rayner, Ed Miliband or Andy Burnham; Saxo UK's Neil Wilson said 'bond vigilantes are lurking' over the risk that Chancellor Rachel Reeves could be unseated alongside Starmer.
UK government borrowing costs fell and the pound rose on Friday after Prime Minister Keir Starmer said he would remain in office despite Labour losing hundreds of council seats across England. Investors concluded that the immediate pressure on his leadership had eased, with Labour on track for smaller losses than election experts had predicted.
The yield on benchmark UK 10-year gilts, which had jumped earlier in the week on fears of a leadership challenge if the local elections and the Scottish and Welsh devolved parliament results were severe, was down 5 basis points at 4.89%, outperforming equivalent US Treasuries. Thirty-year bond yields, which hit a 28-year high of 5.77% earlier in the week, fell 7 basis points to 5.56%, their lowest in more than two weeks. The pound had gained three-quarters of a cent against the US dollar by mid-afternoon and was slightly higher against the euro.
Matthew Ryan, head of market strategy at Ebury, said markets had been pricing in higher government spending under a more leftwing successor such as Angela Rayner, Ed Miliband or Andy Burnham, funded by tax hikes and additional borrowing. Neil Wilson, investor strategist at Saxo UK, said "bond vigilantes are lurking," attuned to the risk that Chancellor Rachel Reeves could lose her job if Starmer departed. "Political risks associated with a Starmer/Reeves defenestration are bound up with already rising fiscal and inflationary risks for the UK economy," Wilson said.
The City consultancy Capital Economics said any replacement leadership would face the same constraints. "If Starmer/Reeves were ousted in the aftermath of what appears to be a dire performance by the government in yesterday's local elections, we suspect the result would probably be higher interest rates and higher gilt yields than otherwise. We doubt a new leadership would be any more successful at boosting medium-term economic growth either, not least because the current fiscal constraints would remain."