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The pound and gilts came under pressure on Thursday as investors remained concerned about risks to UK assets due to growing leadership speculation around Sir Keir Starmer.
UK borrowing costs rose to their highest level since November, with 10-year yields rising 0.03 percentage points to 4.59 per cent, as the Prime Minister faced growing anger from his party over the fallout from the Jeffrey Epstein scandal and his decision to appoint Lord Peter Mandelson as US ambassador in 2024.
The pound was down 0.6 percent against the dollar at $1.356 and down 0.4 percent against the euro.
The sell-off threatens to undermine a period of relative calm in the gilt market after Chancellor Rachel Reeves’ tax rises in her November budget eased investor concerns over the scale of government borrowing.
Mark Dowding, chief investment officer of fixed income at RBC Bluebay Asset Management, said, “We thought the political risks would be limited until later this year, but the revelations regarding Lord Mandelson could be the final nail in the coffin for a leader who has long been unpopular in his own party.”
In light of this increased political risk, the asset manager has added to an already existing bet that the pound will weaken against the euro, Dowding said.
Investors are concerned about increased borrowing under any Starmer successor. The Prime Minister and Reeves have repeatedly stressed their commitment to the government’s self-set borrowing limit. Andy Burnham, a potential leadership candidate, has said the UK should not remain in “shock” in bond markets.
Investors had expected this risk to increase after regional elections in May, but the reaction to Starmer’s decision to appoint Mandelson has reignited concerns over volatile politics.
“The market feels confident from a fiscal perspective with Starmer-Reeves,” said ING strategist Francesco Pesole. Currency markets, he said, “are pricing in some risk; Starmer cannot escape this Mandelson story”.
Gordon Shannon, fund manager at Twentyfour Asset Management, said gilt underperformance was “linked to Starmer’s increased vulnerability”.
But he also said that the reaction “so far appears to be influenced by the expectation that any replacement will come from the less anti-market wing of the party”.
