UK 30-year gilt yield hits 28-year high on leadership turmoil

A leadership challenge against U.K. Prime Minister Keir Starmer sent government borrowing costs to their highest level in 28 years and weakened the pound, as investors priced in the risk of a fiscally expansionist successor.

The yield on the 30-year gilt jumped 9 basis points to 5.76 percent on Tuesday, its highest since 1998, after more than 80 lawmakers from the ruling Labour Party called for the prime minister to resign. The move shows a deep investor sensitivity to British political stability, with the memory of the September 2022 mini-budget crisis still fresh.

The market reaction was broad, signaling investor concern over potential shifts in fiscal policy. The 10-year gilt yield also rose 9 basis points to 5.09 percent, London’s FTSE 100 index slid 0.4 percent, and the British pound fell 0.5 percent against the dollar to $1.35.

The timing of a potential departure by Starmer is now the key variable for markets. A swift resignation could favor a centrist candidate, but a delay could allow Manchester Mayor Andy Burnham, who is seen as more willing to increase public spending, to secure a parliamentary seat and enter the race.

Succession Scenarios Drive Market Jitters

The current turmoil stems from brutal losses in local elections, which prompted dozens of Starmer's own MPs to call for his exit. While Starmer has vowed to continue governing, prediction market Polymarket puts a 79 percent chance on his departure by the end of the year. The key division within the party is over when he should leave. Some MPs prefer an immediate contest, potentially elevating a market-friendly candidate like Health Secretary Wes Streeting. Others want Starmer to remain long enough for Burnham to become eligible to run.

Burnham, who is not currently a Member of Parliament, has previously signaled a looser fiscal stance. In September, he said the government shouldn’t be “in hock” to the bond market, a comment that investors interpret as a willingness to challenge the fiscal orthodoxy that Starmer and his finance minister Rachel Reeves have prioritized.

This dynamic has reawakened fears of the so-called "bond vigilantes" who aggressively sold off U.K. debt in response to former Prime Minister Liz Truss's unfunded tax cuts in 2022. That event sent gilt yields soaring, triggered a currency crisis, and forced an emergency intervention from the Bank of England. The current spike in yields suggests investors are prepared to act similarly on any perceived move away from fiscal consolidation, raising the stakes for the U.K.'s borrowing costs and the stability of its debt market.

This article is for informational purposes only and does not constitute investment advice.