UK Bond Sell-Off Amid Starmer Crisis... Yields Hit 28-Year High

Inflation Fueled by War and Political Risks
Concerns of Fiscal Irresponsibility Under New Leadership
"Bond Vigilantes" Emerge as Starmer's Only Supporters

Long-term UK government bond yields have soared to their highest levels since 1998 amid mounting pressure for the British Prime Minister to resign. With inflationary pressure increasing due to various ongoing wars and heightened leadership change risk, market volatility in the region has spiked to what analysts describe as “rollercoaster” levels.

The Financial Times (FT) reported on May 12 (local time) that cracks in Prime Minister Keir Starmer’s leadership triggered a sell-off in UK government bonds. The report added that this would further strain the nation’s finances.

The yield on the 30-year UK government bond (gilt) climbed by 0.14 percentage points (1bp=0.01 percentage point) intraday, reaching 5.813%. This represents an increase of about 20 basis points over two trading sessions. The yield later eased slightly to 5.764%, but remains close to 6%. The 10-year bond yield also rose to 5.13%, the highest level since 2008. In the bond market, prices and yields move inversely; intensifying selling leads to lower prices and higher yields.

Prime Minister Starmer is facing calls for voluntary resignation from within his own party. Although he took office after leading the Labour Party to a landslide victory in the July 2024 general election, his approval ratings have plummeted due to disappointment with economic stagnation, welfare, and immigration policies. Since early this year, controversy surrounding the appointment of Peter Mandelson as ambassador to the United States has put him at risk of resignation, and after Labour’s crushing defeat in local elections on May 7, calls for accountability have grown. Several parliamentary private secretaries have resigned in succession, and for the first time, a cabinet-level official has also stepped down from the government.

The UK bond market has not yet recovered from the shock of the COVID-19 pandemic in 2020, and it has also been affected by Russia’s invasion of Ukraine in 2022 and the war in Iran triggered by the United States at the end of February this year. The country now faces not only the burden of fiscal spending and an energy crisis, but also its own political risk. Gordon Shannon, a fund manager at TwentyFour Asset Management, commented, “Prolonged leadership transitions are a major deterrent for foreign investors,” adding, “Buying UK gilts now is like getting on a rollercoaster.”

Kit Juckes, chief FX strategist at Societe Generale (SG), wrote in an investor note that “the Prime Minister’s only remaining supporters seem to be the bond vigilantes.” This reflects concerns that with Labour still in power, a new leadership could worsen the national finances by pumping more money into the economy. The term “bond vigilantes,” coined by U.S. strategist Edward Yardeni in the 1980s, refers to bond investors who attempt to enforce fiscal discipline by demanding higher yields from governments they perceive as fiscally irresponsible.

Steve Reed, the UK Housing Secretary, also urged lawmakers to support Prime Minister Starmer on his social media account X (formerly Twitter), stating, “Instability has real consequences for people’s lives.” The rise in long-term bond yields can negatively affect the real economy by increasing the cost of loans and credit. For this reason, U.S. Treasury Secretary Scott Bessent has identified the yield on the 10-year U.S. Treasury note, rather than the federal funds rate, as the most important market indicator for policy decisions.

Amid investor anxiety, the value of the pound has also declined. The pound fell 0.6% against the dollar to $1.353, and stood at 1.153 euros against the euro. There are also concerns that this simultaneous decline in bond and currency markets may persist for some time. Lee Hardman, senior FX strategist at MUFG, said, “The leadership contest will heighten political uncertainty in the short term,” predicting that “this will have a negative impact on the pound and the gilt market.”

Meanwhile, the day’s sell-off in UK government bonds was analyzed by foreign media as leading to a rise in global bond yields. The yield on the U.S. 10-year Treasury note rose by 4.9 basis points from the previous day to 4.461%. The 30-year Treasury yield increased by 3.8 basis points to 5.025%, the highest in the past 20 years. The 2-year Treasury yield, which is sensitive to the Federal Reserve’s policy rate, climbed 4.2 basis points to 3.989%.

This content was produced with the assistance of AI translation services.