Gilt yields hit 1998 high as Streeting quits to challenge Starmer

UK government borrowing costs surged to their highest level in nearly three decades on Wednesday after Health Secretary Wes Streeting resigned to launch a leadership challenge against Prime Minister Keir Starmer. The move opened a new front for bond markets already strained by the Iran war and a global energy crunch.

The yield on the 30-year gilt touched 5.81 per cent, its highest since 1998, while the 10-year benchmark climbed to 5.13 per cent, a level last seen in 2008, according to Tradeweb data cited by Reuters. Sterling fell 0.7 per cent against the dollar in morning trading.

“Everything seems to be aligning for a leadership contest that will unease bond investors,” said Neil Wilson, investor strategist at Saxo UK, speaking to CNBC.

Streeting delivered his resignation letter to Starmer on Wednesday morning. He wrote that “it is now clear that you will not lead the Labour Party into the next general election” and called for a “fresh start” for the party, Reuters reported. It is the most senior cabinet resignation Starmer has faced since entering Downing Street.

The bond market calculus

Kathleen Brooks, research director at XTB, said the sell-off was about more than one minister. “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,” she said.

The UK’s fiscal position was already under strain before the political crisis erupted. The economy expanded just 0.6 per cent in the first quarter of 2026, according to CNBC. Government borrowing has been pushed higher by defence spending tied to the Iran conflict and by energy subsidies that remain in place despite repeated Treasury pledges to unwind them.

The Bank of England has kept its base rate elevated through early 2026 to contain inflation that has proved stickier than forecast. Analysts said that leaves limited room for rate cuts to cushion a sell-off driven by political risk, a dynamic that echoes, in milder form, the gilt crisis that followed Liz Truss’s mini-budget in September 2022.

The arithmetic of a challenge

Under Labour Party rules, a leadership contest is triggered when 20 per cent of the parliamentary party, 81 of the current 403 Labour MPs, submit letters of no confidence to the chair of the Parliamentary Labour Party. More than 80 MPs have publicly called on Starmer to resign, though only 158 have publicly declared their support for him, CNBC reported.

If the threshold is crossed, the contest would unfold over several weeks. Candidates need the backing of at least 10 per cent of Labour MPs to appear on the ballot, after which the vote goes to the party membership of roughly 370,000 people. The BBC has detailed the full mechanics and expected timetable.

Who else might run

Angela Rayner, the former deputy prime minister who was cleared of tax wrongdoing earlier this year, is widely seen as a potential candidate. She has not publicly declared but has been meeting senior union leaders in recent days, according to people familiar with the discussions.

Other names circulating among Labour MPs include a sitting cabinet minister who has privately told colleagues they would stand if Streeting falters. No formal declaration has been made.

What happens next

Starmer is expected to address his parliamentary party on Thursday. His allies told Bloomberg that he intends to fight any challenge rather than step aside. Gilt yields are at generational highs, and the government’s annual debt-servicing costs are climbing.

For bond investors, the immediate question is not who wins but how long it takes. “A drawn-out contest keeps the fiscal premium embedded in gilts,” Brooks said. “The market wants resolution, and it is not going to get it quickly.”

The 30-year gilt closed at 5.78 per cent, down slightly from its intraday peak of 5.81 per cent but still at a level that would add billions to government borrowing costs if sustained through the summer.