Government borrowing costs have remained steady amidst ongoing uncertainty surrounding Keir Starmer’s tenure as Prime Minister. Apart from the political upheaval, there is significant focus on bond markets due to the UK’s debt dependency. The country’s borrowing expenses are already elevated compared to other advanced economies, a consequence of past crises and investor apprehensions about high inflation levels.
After the recent King’s Speech, the yields on both short-term and long-term Treasury gilts initially dropped and then experienced a slight uptick. As of Wednesday noon, the yield on 10-year gilts was at 5.09%, while for 30-year gilts it reached 5.76%. The recent rise in gilt yields pales in comparison to the 0.30% surge following Liz Truss’s failed mini budget in 2022.
There are worries that a leadership change could further escalate gilt yields, impacting millions of individuals and their financial situations. Fixed-rate home loans are influenced by swap rates, which reflect how much banks charge each other for lending. These swap rates are tied to gilt yields and future expectations concerning the Bank of England’s base rate.
According to the Financial Times, ten fund managers highlighted the risk of gilt yields increasing even more if Greater Manchester mayor Andy Burnham were to replace Starmer as PM. On the contrary, Health Secretary Wes Streeting was viewed as the least risky alternative. Reports suggest that Streeting might resign as early as tomorrow.
Economist Paul Johnson, former head of the Institute for Fiscal Studies, emphasized the significant impact of rising government debt costs on public spending. He noted that political instability, as witnessed during Liz Truss’s brief premiership four years ago, can lead to increased borrowing costs, limiting funds for other government expenditures.
Johnson expressed concerns about market uncertainty surrounding potential new leadership and their fiscal policies, highlighting the impact on economic growth. The boss of deVere Group cautioned that if Streeting resigns and challenges for leadership, it could trigger a crisis for gilts and the pound. He stressed that markets abhor uncertainty, particularly in the face of political turmoil, which could raise doubts about the country’s fiscal stability.