The cost of government borrowing has crept higher as Keir Starmer\u2019s crucial speech failed to dispel investor \u201cjitters\u201d in the bond markets over political instability combined with fears of rising inflation.<\/p>\n
The yield, effectively the interest rate, on the benchmark 10-year UK government bonds (known as gilts) rose eight basis points (or 0.08 of a percentage point) to 5% on Monday.<\/p>\n
The yield on 30-year gilts rose 9.3 basis points to 5.67%, edging closer to the 28-year high of 5.78% last week <\/a>when uncertainty about Starmer\u2019s future as prime minister was intensifying.<\/p>\n In his speech<\/a>, Starmer said he would fight any leadership challenge and would not walk away from his responsibilities after Labour\u2019s drubbing in local elections in England and parliamentary contests in Scotland and Wales last week.<\/p>\n Borrowing costs fell on Friday<\/a> as the results of the elections emerged with signs that Labour had not suffered as badly as first feared. Those falls, however, were more than erased by Monday\u2019s rises.<\/p>\n Susannah Streeter, the chief investment strategist at Wealth Club, a non-advisory investment service, said the speech had not \u201cdone the trick of calming bond markets\u201d.<\/p>\n \u201cThere is still a sense of jitters playing out as concerns about political instability collide with inflationary fears prompted by the ongoing conflict in the Middle East,\u201d she said.<\/p>\n Bond yields move in the opposite direction to bond prices because investors want to pay less and get a bigger reward for the risk of holding them. Higher yields increase the cost of borrowing for the government and eat away at the headroom that the chancellor, Rachel Reeves<\/a>, has built up against her fiscal rules<\/a>.<\/p>\n The chief UK economist at Deutsche Bank, Sanjay Raja, estimated last week that more than half of the \u00a324bn margin for error<\/a> Reeves created by raising taxes in last autumn\u2019s budget may already have been wiped out by higher gilt yields and the prospect of weaker economic growth.<\/p>\n Reeves has sought to win back bond market investors\u2019 confidence since Labour<\/a> came to power after Liz Truss\u2019s short-lived government alarmed markets in 2022 with huge unfunded tax cuts. Reeves has repeatedly pointed out that \u00a31 in every \u00a310 the public sector spends goes on debt interest and said she is intent on bringing that down.<\/p>\n Investors, however, are becoming increasingly worried that the risk of rising inflation as a result of soaring energy prices linked to the Iran war, alongside in-fighting among Labour MPs over Starmer\u2019s future, will lead to a downgrade in the UK\u2019s creditworthiness.<\/p>\n Part of the worry is that if Starmer is forced out of Downing Street, his possible replacements may seek to increase public spending and loosen the government\u2019s fiscal rules. Two potential frontrunners to succeed him, Angela Rayner and Andy Burnham, have hinted that they would like to see higher public spending<\/a>.<\/p>\n