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The pound and gilts came under pressure on Thursday as investors worried about the risks to UK assets of the mounting leadership speculation surrounding Sir Keir Starmer.
UK borrowing costs rose to their highest since November, with the 10-year yield up 0.03 percentage points at 4.59 per cent, as the prime minister faced rising anger from his party over the fallout from the Jeffrey Epstein scandal and his decision to appoint Lord Peter Mandelson as the US ambassador in 2024.
The pound was down 0.6 per cent against the dollar at $1.356, and down 0.4 per cent against the euro.
The sell-off threatens to undermine a period of relative calm in the gilt market since chancellor Rachel Reeves’ tax-raising November Budget eased investors’ concerns over the scale of government borrowing.
“We had thought that political risks would remain contained until later this year, but the revelations with respect to Lord Mandelson may be the final nail in the coffin for a leader who has long been unpopular within his own party,” said Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management.
In light of this growing political risk, the asset manager has added to a pre-existing bet that the pound will weaken against the euro, Dowding added.
Investors worry about a rise in borrowing under any successor to Starmer. The prime minister and Reeves have repeatedly stressed their commitment to the government’s self-imposed borrowing limits. One potential leadership candidate, Andy Burnham, has said the UK should not be “in hock” to bond markets.
Investors had expected this risk might flare up after regional elections in May, but the backlash over Starmer’s decision to appoint Mandelson has reignited concerns over unstable politics.
“Markets feel confident from a fiscal standpoint with Starmer-Reeves,” said Francesco Pesole, a strategist at ING. Currency markets are “pricing in some risk Starmer may not survive this Mandelson story”, he added.
Gordon Shannon, a fund manager at TwentyFour Asset Management, said the gilt underperformance was “linked to Starmer’s rising vulnerability”.
But he added that the reaction “so far appears tempered by hopes that any replacement would come from the less market-hostile wing of the party”.