Starmer turmoil puts gilt market on edge as polls open

UK bonds, or gilts, are trading steady – for now – but the market is one step away from another potentially brutal selloff following an ugly result for Labor in Thursday’s local elections in England, Wales and Scotland, the CEO of a global financial advisory giant has warned.

Nigel Green’s devere group The warning comes as Britain’s bond market remains dangerously close to the levels associated with the Liz Truss mini-budget meltdown, with investors worried about Labour’s infighting, weak growth, rising borrowing requirements and fears that Keir Starmer’s government could cave in to growing political pressure.

Benchmark 10-year gilt yields rose above 5% this week before easing marginally on Thursday, while 30-year borrowing costs remain near the highest level seen since the pension-fund crisis triggered by the Truce government in 2022. Sterling also came under fresh pressure as traders assess Britain’s fiscal trajectory against deepening political uncertainty.

Reports that Labor MPs are preparing to move against Starmer after his devastating defeat in local elections have raised concerns in financial markets that Britain is heading into another round of instability at exactly the wrong time.

“Gilt markets have been smelling of political weakness lately,” says Nigel Green.

“Investors are looking at Labor and seeing that the government is clearly starting to lose control of the narrative, losing control internally, and therefore, potentially losing control over fiscal discipline.

“This is exactly the type of environment that causes bond traders to become aggressive.”

Labor is expected to suffer major losses in councils in England, while Reform UK and the Greens are gaining momentum and dissatisfaction with the government over taxes, cost of living and economic stability is growing.

Nigel Green says markets are now questioning whether Chancellor Rachel Reeves will be able to maintain credibility as pressure increases within Labor following the results.

“The danger to Britain is not just the political embarrassment for Starmer. The danger is what comes next.

“If Labor MPs panic after huge losses, pressure for more spending, softer fiscal rules and more intervention immediately increases.

“Bond investors are already grappling with those scenarios.”

The UK enters the election with public debt close to 100% of GDP, weak productivity, weak growth and borrowing costs that have risen sharply over the past year.

The UK is expected to issue more than £250 billion of gilts this financial year alone, forcing the market to absorb a huge wave of debt supply at a time when confidence is already weak.

The CEO of Deavere Group says comparisons to the Truss disaster are inevitable.

“The mini-budget crisis has fundamentally changed the way investors view UK risk.

“Markets have learned that the UK will not be immune to a full confidence shock if fiscal credibility disappears.

“People in Westminster still underestimate how quickly the bond market moves once confidence is lost.”

The Truss government’s ill-funded tax-cut plans destroyed UK assets in 2022, sending 30-year gilt yields above 5%, hitting pension funds and forcing the Bank of England to intervene emergencyally to prevent a wider financial crisis.

The chief executive says investors remain extremely sensitive to any suggestion Britain could return to reckless policymaking.

“The long end of the gilt curve remains a pressure point as this is where investors express fear over long-term borrowing and political potential.

“If confidence weakens again, these yields could rise violently.”

“Britain cannot afford another credibility incident.”

Sterling is also strongly linked to the political backdrop, with currency traders focusing on whether Labor can retain control over spending and borrowing as economic conditions worsen.

Nigel Green explains, “A weak pound sends inflationary pressure straight back into the system.”

“This pushes gilt yields even higher as investors demand more compensation for the risk.

“It very quickly becomes a vicious cycle.”

He warned that markets no longer automatically give Britain the benefit of the doubt.

“For years the UK traded on notions of stability and efficiency, but that premium has diminished.

“International investors now look at Britain more seriously because the Truss episode showed how quickly things can unravel.

“Gilts are stable today as people head to the polls, but one should not confuse stability with confidence.”

Nigel Green says that if the election defeat opens rifts within Labor or raises further questions on Starmer’s leadership, then the next 48 hours could prove to be important for market sentiment.

“The bond market wants discipline, authority and credibility. Right now investors are seeing the cracks.”

“Should Labor come out of these elections wounded and divided, traders will immediately begin pricing greater fiscal risk into UK assets.

“The UK sits in an extremely risky position economically. A serious political shock could send gilt markets sharply higher again.”

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