By Renae Dyer and Miriam Mukuru
Yields on 30-year U.K. government bonds rose to their highest since 1998 and sterling fell Tuesday as fiscal concerns mounted on the prospect of Prime Minister Keir Starmer stepping down.
Starmer faced a crucial cabinet meeting Tuesday as he tried to avert a leadership challenge after Labour had significant losses in last week's local elections.
Some investors are concerned that should a more left-leaning Labour leader replace Starmer, this could lead to increased government spending and worsen public finances. Such a scenario would likely push gilt yields even higher and weaken sterling, analysts said.
"A leadership contest whether immediate or more drawn out will add to political uncertainty in the near term, which is negative for the pound and gilts. The risk of a bigger selloff will increase if Labour shifts toward the left," Lee Hardman, senior currency analyst at MUFG, said.
Yields on 30-year U.K. government bonds, known as gilts, rose to a high of 5.802%, surpassing the previous week's peak, according to LSEG data. Ten-year gilt yields rose 11 basis points to a seven-week high of 5.116%, Tradeweb data showed.
Sterling fell to a near three-week low against the euro at 0.8697 pounds and a one-week low of $1.3499 against the dollar in early European trade, according to LSEG data.
By Monday evening local time, 75 of Labour's 403 lawmakers had publicly called on Starmer to resign and make way for another leader.
"In the markets, the focus seems to be shifting less and less on whether, and more on when, Starmer will have to step down," Commerzbank foreign-exchange analyst Michael Pfister said in a note.
What matters most are the views of any successor, Pfister said. Even though Starmer has become unpopular, he has aimed to balance the budget and potential successors might see things differently, he said.
If there is a U.K. leadership change, it risks a shift toward left-wing policies which could favor higher public spending and potentially more government borrowing, Berenberg economist Andrew Wishart said in a note.
That would put a risk premium on U.K. assets, he said.
Write to Renae Dyer at renae.dyer@wsj.com and Miriam Mukuru at miriam.mukuru@wsj.com
(END) Dow Jones Newswires
05-12-26 0439ET
