Long-dated UK borrowing costs surged to their highest in nearly 30 years, sterling slumped and shares fell on Tuesday as investors brace for a potential change of leadership that could weaken fiscal discipline.
Keir Starmer was consulting colleagues about whether he can stay on as Britain's prime minister on Tuesday, ahead of a crunch cabinet meeting at 0830 GMT that comes after ministerial aides quit and almost 80 lawmakers publicly called for him to go following a last week's big defeat in local elections.
Investors are worried that a replacement would be more left-wing than Starmer and push for more spending at a time when Britain's finances are already stretched.
UK borrowing costs remain the highest among the Group of Seven advanced economies and have risen the most since the Iran war, so a further rise will add to the pressure on its public finances.
The benchmark 10-year gilt yield jumped 11 basis points (bps) to 5.11 percent, just below the highest levels since 2008 it hit in March on concerns around the inflationary impact of the Iran war.
Longer-dated 20 and 30-year yields, more sensitive to fiscal risks, rose to their highest since 1998, at 5.12 percent and 5.80 percent.
"The bond market is reacting not only to Starmer’s potential departure, but also to who his successor could be, and to the prospect of a drawn-out leadership battle that leads to more fiscal promises that the UK cannot afford," said Kathleen Brooks, research director at broker XTB.
The pound dropped 0.7 percent to US$1.351 and was 0.4 percent lower against the euro at 86.92 pence.
Stock markets also came under pressure with the FTSE 100 index down 0.5 percent.
British banks also fell with Barclays dropping 4 percent, while Natwest and Lloyds fell over 3 percent each.
British banks were leading declines among European banking stocks.
Analysts at JPMorgan said they now expected Britain's banking surcharge to rise to 5 percent from 3 percent as a leftward shift in policy is more likely.
Bond markets were also under pressure across Europe as hopes for a peace deal on Iran faded on Tuesday as US President Donald Trump said a ceasefire was on "life support".
Britain's 10-year borrowing costs have surged over past decade
Reuters
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