Starmer plot rocks gilt markets as fears grow ahead of local elections

An alleged plot to oust Prime Minister Keir Starmer, combined with the risk of a brutal Labor performance in Thursday’s local elections, has put gilt markets on high alert – still deeply scarred by the Liz Truss mini-budget crisis and extremely sensitive to any sign of political or fiscal instability, the CEO of a global financial advisory giant has warned.

warning from devere group Nigel Green comes as Labor MPs are reportedly organizing an open letter to pressure Starmer to set out a timetable for his departure, citing the loss of 1,900 council seats and competition from Reform UK and the Green Party.

He commented, “Markets have long memories, and that memory in the UK gilt market is dominated by Liz Truss.”

“The 2022 mini-budget crisis is still the benchmark for what happens when fiscal credibility is called into question. Yields rose, long-standing delinquencies were hit hardest and the Bank of England was forced to take emergency action to stabilize the system.

“Investors are looking at the current political developments through exactly the same lens.

“Any sign of instability around Prime Minister Keir Starmer or pressure on Chancellor Rachel Reeves immediately raises concerns about whether fiscal discipline could weaken.”

Britain is entering this political flashpoint with very little margin for error. Public debt remains close to 100% of GDP, borrowing continues at high levels, and gilt issuance is expected to exceed £250 billion this financial year.

Growth remains fragile, making the fiscal outlook highly sensitive to even small changes in policy or confidence.

“If Labor suffers a heavy defeat and internal divisions intensify, gilt markets will begin to view looser fiscal policy as more likely, whether through increased spending, weaker regulations or political concessions.”

Attention is likely to focus on the longer end of the curve, where maturities between 10 and 30 years are most affected by concerns about supply and long-term fiscal sustainability.

Nigel Green says, “The long end is where the damage appeared during the Liz Truss episode, and this is where it will appear again.” “When confidence wanes investors demand higher term premiums, and that causes yields at those maturities to rise sharply.”

During the 2022 turmoil, 30-year gilt yields briefly rose above 5%, causing severe strains in the liability-driven investment strategies used by pension funds. The rapid revaluation forced the Bank of England to step in with emergency gilt purchases to prevent a wider financial stability crisis.

“That episode highlights how investors view UK risk,” explains the CEO of Deavere.

“A sudden loss of confidence could spread through the system more quickly than policymakers expected. Bond markets tend to move as expected.”

Sterling is strongly linked to this dynamic. Any loss of confidence related to leadership uncertainty or fiscal easing will weaken the currency, increase imported inflation and put upward pressure on bond yields.

“Currencies and bonds move together in these situations,” says Nigel Green.

“A weaker pound raises inflation expectations, and that pushes gilt yields higher. This becomes a feedback loop that is difficult to control once it starts.”

Reports that Labor backbenchers are preparing an open letter to Prime Minister Keir Starmer, drawing comparisons with the internal campaign that led to Sir Tony Blair’s departure in 2006, add another layer of uncertainty at a crucial moment.

“Investors are focused on control,” says Nigel Green. “If Thursday’s results highlight rifts within the government, the concern is not just about political leadership, but whether Rachel Reeves can maintain a credible grip on spending and borrowing, going forward.”

The Deavere CEO concluded:

“A potentially massive election shock, an organized push against Starmer, and questions over how tightly Reeves can hold the fiscal line creates a clear risk signal for UK bond markets.

“If those pressures build after the vote, gilt investors will move faster, pricing in higher borrowings, demanding more compensation for the risk, and pushing yields higher in a way the UK cannot afford.”

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