UK gilt yields surge to 28-year high as pressure mounts on Starmer

The yield on the UK’s 30-year government bond surged to 5.81 per cent on Monday, the highest since 1998, as investors priced in the growing likelihood that Prime Minister Keir Starmer will be forced from office within weeks.

It was the sharpest single-day move in long-dated gilts since the 2022 mini-budget crisis under Liz Truss — a 14-basis-point jump that pushed borrowing costs past a threshold the market had not crossed in 28 years. The 10-year gilt yield also rose sharply, reaching 5.13 per cent, its highest since the 2008 financial crisis. Sterling fell 0.5 per cent against the dollar to $1.35, extending a slide that began late last week.

Behind the sell-off was a weekend in which roughly 80 Labour MPs called on Starmer to resign after local election results that saw the party lose control of councils across England. With the prime minister’s authority severely weakened, traders began repricing UK sovereign debt for a world in which the current government’s fiscal commitments were no longer a fixed reference. By comparison, the yield on Germany’s 10-year bund sat at 2.8 per cent — the widest spread between UK and German 10-year borrowing costs in over three decades.

“For many the writing is on the wall at this stage, it’s just a matter of how quickly his exit happens,” Jordan Rochester, a strategist at Mizuho Bank in London, told Reuters.

“Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile,” said Neil Wilson, chief analyst at Saxo Markets.

Inside the sell-off

The gilt market’s reaction reflects a concern that runs deeper than Starmer’s personal position. A leadership vacuum at Westminster would stall the fiscal consolidation Chancellor Rachel Reeves has promised international creditors — the same programme she built her credibility on. Reeves has pledged to bring the deficit down over two fiscal years. A contested leadership contest lasting several weeks could delay or derail that timetable entirely.

Threadneedle Street’s Debt Management Office moved quickly. It delayed a planned syndicated gilt sale on Monday, citing “market conditions” and declining to name a new date. Such a step is rare — the last time the DMO pulled a scheduled auction was during the chaotic days after the Truss mini-budget in September 2022.

Angela Rayner, the deputy prime minister, has emerged as the most likely successor should Starmer step down. Allies told the Guardian she would “not shirk” if asked to serve, though Rayner herself has not publicly commented on the leadership question. Rachel Reeves and home secretary Yvette Cooper have also been mentioned as potential contenders, but neither has declared.

Starmer’s response

Starmer addressed the cabinet on Monday morning and told them the country “expects us to get on with governing,” according to a BBC report. “That is what I am doing and what we must do as a cabinet.”

A Number 10 spokesperson added after the meeting that Starmer retained the confidence of his ministers and intended to lead Labour into the next general election. But the statement did nothing to arrest the sell-off. By the London close, the 30-year gilt was still trading near the day’s highs. Pressure on the pound, meanwhile, persisted against both the dollar and the euro.

What comes next

The immediate arithmetic is parliamentary. A formal leadership challenge requires roughly 120 Labour MPs to call publicly for Starmer’s resignation. Several backbenchers told CNBC over the weekend that they expected the threshold to be reached within days.

Two paths then open. If Starmer resigns, the party holds a leadership election lasting several weeks. If he refuses, a vote of no confidence can be forced by the parliamentary Labour Party. Either route guarantees a period of political uncertainty at a moment when gilt yields are already embedding a fiscal risk premium not seen in nearly three decades.

For Reeves, the fiscal arithmetic is equally stark. Every percentage-point rise in gilt yields across the curve adds roughly £15 billion to annual debt-service costs over a three-year horizon, eating into headroom she had reserved for public services. The Office for Budget Responsibility is due to deliver new fiscal forecasts within the month — projections that will almost certainly look worse than the last set. International investors, already sceptical of UK fiscal discipline after the Truss episode, are watching the OBR’s next set of numbers closely.

Governor Andrew Bailey and the Bank of England have so far stayed silent. That may not last. Bailey is scheduled to appear before the Treasury Select Committee on Thursday, and MPs on the committee have already signalled they intend to press him on whether Threadneedle Street views the gilt sell-off as orderly — or as something that demands a response.