Starmer's resignation would disrupt the bond market, and rising UK bond yields would be detrimental to the economy.
2026-02-11 13:32:45
British Prime Minister Keir Starmer is resisting calls to resign, but an analyst warns that a "sword of Damocles" hangs over the influential bond market until his successor is determined.
Despite his ties to the disgraced financier and sex offender Jeffrey Epstein, Starmer faced increasing criticism and pressure for appointing Mandelson as U.S. ambassador in 2024.
The release of millions of new emails and documents related to Epstein has provided new insights into the relationship between Mandelson and Epstein, who died in prison in 2019.
On Monday, government borrowing costs jumped after key members of Starmer's team resigned and a senior Labour politician called for his resignation. By Tuesday morning, yields on benchmark 10-year and 30-year UK government bonds had fallen by 2 to 3 basis points after Starmer's supporters rallied around him.
Market observers say the prospect of challenges facing leadership could derail the policy path set by Starmer and Chancellor Reeves, posing a significant risk to UK government bond investors.
If Starmer steps down, or a challenger gains enough support to challenge him, it could trigger a leadership contest that could last for weeks.
Mizuho’s EMEA FICC strategy head, Rochester, said in a report Monday afternoon that if a leadership contest is triggered, the UK government bond market could be “subject to random political headlines” as the search for a new leader drags on.
Rochester stated in his report: "We may not see any moves from Starmer this week, and by next week we'll be back to trading CPI and PMI indices as usual." "But ultimately, for many in the market, it's only a matter of time before the local elections see Starmer's Labour Party suffer losses in the vote. This is a Damocles' sword hanging over UK bond traders until 'who's next?' is finally resolved."
Some local councils in the UK will hold elections later this year.
Peel Hunt’s chief economist, Pickering, said on Tuesday that the bond market would prefer Starmer and Reeves to remain in their positions.
Speaking about the ruling party, he said: "Timing is politically important, and Labour seems to be proportionally confused and fearful of the bond market." "What Westminster doesn't understand is that, in terms of fiscal policy, the problem for developed, wealthy countries like the UK isn't debt or deficits, but inflation. The UK is an inflation outlier. That's why we're paying a premium in the bond market. It's not an exception when it comes to debt or deficits."
He said the headaches in the bond market would ease when inflation is likely to cool in the coming months.
Pickering said: "I think Starmer will be slightly surprised by the magnitude of the decline in bond yields, and so will the Labour Party. They'll say, well, this is actually a fairly safe prime minister right now, so I think he'll squeeze through."
Lloyd, head of investment at Shackleton Advisers, said on Tuesday that a leadership contest would "almost certainly" cause short-term volatility in the UK bond market and raise borrowing costs through higher yields. "A protracted contest could impact the economy, not to mention the potential impact on consumer confidence, if UK gilt yields remain higher than other bond markets for an extended period."
In the past, the bond market has expressed support for Reeves’ self-imposed fiscal rules, which stipulate that government day-to-day spending must be funded by tax revenue rather than borrowing, and that the ratio of public debt to economic output must decline by 2029-2030.
Last summer, when Reeves' political future was questioned, UK government bond yields surged 22 basis points in a single day, with market observers saying at the time that investors were worried her departure would lead to increased government spending and borrowing.
Lloyd said the unease in the UK bond market stemmed largely from concerns about a potential successor who was politically more left-leaning than Starmer.
If someone succeeds them before June, they will be the sixth British prime minister in 10 years.
In 2022, then-Prime Minister Truss announced a series of unfunded tax cuts that destabilized the bond market, forced the Bank of England to intervene, and led to Truss's resignation just 44 days after taking office.
Among the G7 countries, the UK has the highest long-term borrowing costs. Of these countries, only the UK offers yields exceeding 5% on 20-year and 30-year bonds.
Despite his ties to the disgraced financier and sex offender Jeffrey Epstein, Starmer faced increasing criticism and pressure for appointing Mandelson as U.S. ambassador in 2024.
The release of millions of new emails and documents related to Epstein has provided new insights into the relationship between Mandelson and Epstein, who died in prison in 2019.
On Monday, government borrowing costs jumped after key members of Starmer's team resigned and a senior Labour politician called for his resignation. By Tuesday morning, yields on benchmark 10-year and 30-year UK government bonds had fallen by 2 to 3 basis points after Starmer's supporters rallied around him.
Market observers say the prospect of challenges facing leadership could derail the policy path set by Starmer and Chancellor Reeves, posing a significant risk to UK government bond investors.
If Starmer steps down, or a challenger gains enough support to challenge him, it could trigger a leadership contest that could last for weeks.
Mizuho’s EMEA FICC strategy head, Rochester, said in a report Monday afternoon that if a leadership contest is triggered, the UK government bond market could be “subject to random political headlines” as the search for a new leader drags on.
Rochester stated in his report: "We may not see any moves from Starmer this week, and by next week we'll be back to trading CPI and PMI indices as usual." "But ultimately, for many in the market, it's only a matter of time before the local elections see Starmer's Labour Party suffer losses in the vote. This is a Damocles' sword hanging over UK bond traders until 'who's next?' is finally resolved."
Some local councils in the UK will hold elections later this year.
Peel Hunt’s chief economist, Pickering, said on Tuesday that the bond market would prefer Starmer and Reeves to remain in their positions.
Speaking about the ruling party, he said: "Timing is politically important, and Labour seems to be proportionally confused and fearful of the bond market." "What Westminster doesn't understand is that, in terms of fiscal policy, the problem for developed, wealthy countries like the UK isn't debt or deficits, but inflation. The UK is an inflation outlier. That's why we're paying a premium in the bond market. It's not an exception when it comes to debt or deficits."
He said the headaches in the bond market would ease when inflation is likely to cool in the coming months.
Pickering said: "I think Starmer will be slightly surprised by the magnitude of the decline in bond yields, and so will the Labour Party. They'll say, well, this is actually a fairly safe prime minister right now, so I think he'll squeeze through."
Lloyd, head of investment at Shackleton Advisers, said on Tuesday that a leadership contest would "almost certainly" cause short-term volatility in the UK bond market and raise borrowing costs through higher yields. "A protracted contest could impact the economy, not to mention the potential impact on consumer confidence, if UK gilt yields remain higher than other bond markets for an extended period."
In the past, the bond market has expressed support for Reeves’ self-imposed fiscal rules, which stipulate that government day-to-day spending must be funded by tax revenue rather than borrowing, and that the ratio of public debt to economic output must decline by 2029-2030.
Last summer, when Reeves' political future was questioned, UK government bond yields surged 22 basis points in a single day, with market observers saying at the time that investors were worried her departure would lead to increased government spending and borrowing.
Lloyd said the unease in the UK bond market stemmed largely from concerns about a potential successor who was politically more left-leaning than Starmer.
If someone succeeds them before June, they will be the sixth British prime minister in 10 years.
In 2022, then-Prime Minister Truss announced a series of unfunded tax cuts that destabilized the bond market, forced the Bank of England to intervene, and led to Truss's resignation just 44 days after taking office.
Among the G7 countries, the UK has the highest long-term borrowing costs. Of these countries, only the UK offers yields exceeding 5% on 20-year and 30-year bonds.
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