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British Prime Minister Keir Starmer leaves Downing Street on February 2, 2026 in London, England.
Alicia Abdunde | Getty Images News | Getty Images
British Prime Minister Keir Starmer has defied calls to resign, but one analyst has warned that a “Sword of Damocles” hangs over the influential bond market until it is clear who will succeed him.
Starmer is under increasing pressure after criticism of his decision to appoint Peter Mandelson as ambassador to the United States in 2024 despite Mandelson’s links to disgraced financier and sex criminal Jeffrey Epstein.
The release of millions of new emails and documents related to Epstein has shed new light on Mandelson’s ties to Epstein. Epstein died in prison in 2019.
Government borrowing costs rose sharply on Monday as key members of Starmer’s team resigned and a senior politician from his own Labor Party called on him to step down.
UK 10-Year Gilts
By Tuesday morning – after loyalists rallied around Starmer – benchmark yields 10-Year Phnom Penh fell 2 basis points to 4.509%, while 30 years in Phnom Penh The yield fell 3 basis points to 5.319%. 1 basis point equals 0.01%, and the yield and price move in opposite directions.
“Sword of Damocles”
Market watchers say leadership challenges could upend the policy path set by Starmer and his finance minister Rachel Reeves, posing a significant risk to gilt investors.
If Starmer steps down, or if a challenger gains enough support to mount a challenge, it could trigger a leadership battle that could last weeks.
Jordan Rochester, head of FICC strategy for Europe, the Middle East and Africa at Mizuho, said in a note on Monday afternoon that if a leadership competition were triggered, gilts could be “affected by 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 will be trading CPI and PMI data as usual,” Rochester said in a note. “But ultimately for many in the market it is only a matter of time before Starmer’s Labor party may suffer at the polls at the local elections. In the ‘Who’s next?’ “It was like the Sword of Damocles hanging over the gilded traders before the problem arose. It’s finally solved.”
Some local councils in the UK are due to hold elections later this year.
Kallum Pickering, chief economist at Peel Hunt, told CNBC’s “Squawk Box Europe” on Tuesday that bond markets would prefer Starmer and Reeves to remain in their roles.
“Timing is important in politics – Labor seems equally confused and frightened by the bond market,” he said of the ruling party.
“What Westminster doesn’t understand is that what markets do is that when it comes to fiscal policy, the problem for advanced rich countries like the UK is not debt or deficit, it’s inflation. The UK is an inflation outlier. That’s why we pay a premium in the bond market. It’s not a debt or deficit outlier.”
He said the bond market’s “big trouble” will be eased when inflation is likely to cool in the coming months
“I think Starmer will be a bit surprised by how much bond yields have fallen,” Pickering told CNBC. “Labour will be too, and they will say, in fact, the prime minister is quite safe for a period of time now – so I think he can squeeze through.”
Charlie Lloyd, head of investments at Shackleton Advisers, said on Tuesday the leadership battle would “almost certainly” lead to short-term volatility in the UK bond market and increase borrowing costs by raising yields.
“If Treasury yields are higher than the rest of the bond market for an extended period of time, long-term competition could impact the economy, not to mention the potential impact on consumer confidence.”
In the past, bond markets have expressed support for Reeves’ self-imposed fiscal rules, which stipulate that daily government spending must be funded by tax revenue rather than borrowing and that public debt must fall as a share of economic output by 2029-30.
When Reeves’ political future comes into question last summerBritish government bond yields surged as much as 22 basis points in a single day, and market observers said at the time that investors were worried that her departure would lead to increased government spending and borrowing.
Starmer’s potential successors include left-leaning Angela Rayner, who Resigned Last autumn, health secretary Wes Streeting and former Labor leader Ed Miliband became deputy prime ministers in the wake of the tax scandal.
Lloyd said much of the jitters in the gilt market stemmed from concerns about potential successors who were politically to the left of Starmer, such as Rayner and Manchester Mayor Andy Burnham.
If a replacement is installed before June, they will become Britain’s sixth prime minister in a decade.
In 2022, then Prime Minister Liz Truss announced a series of unfunded tax cuts that rocked gilt markets and forced the Bank of England to intervene, leading to Truss’ Resign After only 44 days on the job.
Britain’s long-term borrowing costs are the highest among G7 countries. among these countries 20- and 30 years In terms of bonds, only the UK has yields above 5%.
