Starmer’s ousting would spark bond market volatility, investors warn
U.K. Prime Minister Keir Starmer leaves Downing Street on February 02, 2026 in London, United Kingdom.
Alishia Abodunde | Getty Images News | Getty Images
UK Prime Minister Keir Starmer is defying calls for his resignation, but an analyst has warned of a “Damocles sword” hanging over the influential bond market until it’s clear who will succeed him.
Pressure mounted on Starmer amid criticism of his decision in 2024 to appoint Peter Mandelson as ambassador to the U.S. despite Mandelson’s links to disgraced financier and sex offender Jeffrey Epstein.
The release of millions of new emails and files related to Epstein cast new light on Mandelson’s relationship with Epstein, who died in prison in 2019.
Government borrowing costs jumped on Monday, as key members of Starmer’s team quit and a senior politician from his own Labour Party called on him to go.
U.K. 10-year gilt
By Tuesday morning — after loyalists rallied around Starmer — the yield on the benchmark 10-year gilt was 2 basis points lower at 4.509%, while the 30-year gilt yield was down 3 basis points to 5.319%. One basis point is equal to 0.01%, and yields and prices move in opposite directions.
‘A Damocles sword’
The prospect of a leadership challenge that could upend the policy path laid down by Starmer and his finance minister, Rachel Reeves, poses a significant risk to gilt investors, market watchers said.
If Starmer stands down, or if a challenger secures enough support to challenge, it triggers a leadership contest that could take weeks.
Jordan Rochester, head of FICC strategy at Mizuho EMEA, said in a Monday afternoon note that, if a leadership contest is triggered, it could make gilts “subject to the whims of random political headlines” as the search for a new leader drags on.
“We may not see any movement from Starmer this week and by next week we’re back to trading CPI and PMI releases as usual,” Rochester said in his note. “But ultimately for many in the market it’s just a matter of time, with the local elections likely to see Starmer’s Labour party suffer at the polls. It’s a Damocles sword hanging above gilt traders until the question as to ‘who’s next?’ is finally resolved.”
Some local councils across the U.K. will hold elections later this year.
Kallum Pickering, chief economist at Peel Hunt, told CNBC’s “Squawk Box Europe” on Tuesday that the bond market would prefer Starmer and Reeves to remain in their positions.
“Timing is important in politics — Labour seem to be mystified and terrified of the bond market in equal proportions,” he said of the governing party.
“The thing that Westminster doesn’t understand that markets do, is that when it comes to fiscal policy, the issue for an advanced, rich country like the UK is not the debt or the deficit, it’s inflation. The UK is an inflation outlier. That’s why we pay the premium in the bond market. It’s not an outlier on debt or deficit.”
He said that a “big headache” for the bond market will be relieved…
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