British Prime Minister Keir Starmer gives an update on the situation in the Middle East at the Downing Street briefing room in London, Britain on March 05, 2026.
Jamie Joy | via reuters
Early results from local council elections on Friday pointed to a major loss for Britain’s ruling Labor Party, raising questions over Keir Starmer’s future as prime minister.
Bond watchers have kept a close eye on his fate in recent weeks, and the result is expected to fuel speculation that the prime minister could be ousted by his party.
Vote counts indicate hundreds of Labor councilors are losing their seats and the leadership of many local councils is changing hands.
Speaking to reporters after the results were revealed on Friday, Starmer described the result as “really tough”.
“Voters have sent a message about the pace of change and how they want their lives to improve,” he said. “Labor was elected to meet those challenges, and I will not walk away from that…and plunge the country into chaos. This was a five-year term I was elected for, (and) I intend to fulfill it.”
yield on benchmark 10 years UK government bonds, known as gilts, were down about 6 basis points at 4.888% by 10:38 a.m. in London on Friday, moving lower in response to Starmer’s insistence that he would not step down.
The predicted election result will not affect the composition of Parliament at Westminster or who replaces who in government, but it reflects a sense of sourness among voters over Starmer’s leadership.
Labor and its main opposition party, the Conservatives, are widely expected to suffer huge losses, while the right-wing Reform UK and left-wing Green Party are projected to make big gains.
Backbench Labor MPs – MPs without any position in the government – are reportedly planning to blame the Prime Minister over the looming deficit and demand his resignation.
In a note on Friday morning, a team of Deutsche Bank analysts led by Jim Reid said the UK will remain in focus for investors as the election results become clearer.
“Today, it will be important to see what Labor MPs and Cabinet ministers are saying, as the gilt market focuses on whether PM Keir Starmer will remain in office following the results,” he said.
“This is due to expectations that a new Labor leader could ease fiscal rules and release gilts, so when Starmer’s position has come into question, it has coincided with a selloff for gilts.”
The full results of the elections will not be known until Saturday afternoon, by which time the results of all the councils that conducted the elections are expected to be declared. The Scottish Parliament and Welsh Senedd, which oversee their respective governments, are expected to announce full results by Friday evening.
Starmer and her finance minister, Rachel Reeves, are battling dissent over fiscal policy within their own ranks, while welfare reform and the appointment of Peter Mandelson, an associate of the late sex offender Jeffrey Epstein, as US ambassador have further damaged inter-party relations.
Health Minister Wes Streeting, former Deputy Prime Minister Angela Rayner and Greater Manchester Mayor Andy Burnham are said to be among the top contenders to replace Starmer. Rayner and Burnham – who is currently ineligible to stand as Prime Minister because he does not hold a seat in Parliament – are broadly considered to be more left-leaning than Starmer.
But markets are favoring Starmer and Reeves maintaining their positions relative to potential alternatives, with UK bonds selling off in previous bouts of uncertainty over its political future.
Last July, yields on UK government bonds – known as gilts – rose after Reeves was seen crying in Parliament, amid reports that his role in Starmer’s Cabinet was at risk. This came after the government made a U-turn on proposed welfare cuts following a rebellion by Labor politicians.
Bond vigilantes surround Guilt
Gilt yields rose earlier this week It has reached its highest level since 2008 amid reports of a planned coup against Starmer from within his own party after the election.
UK 10-year-old gilt
Bond yields and prices move in opposite directions.
Gilt yields were lower across the curve on Friday, with yields on 2-year gilts falling by 5 basis points, while yields on 20- and 30-year gilts fell by 9 and 8 basis points respectively. Longer-term gilt yields also hit multi-decade highs earlier this week, with 30-year borrowing costs reaching their highest level since 1998.
UK 30-year-old gilt
Dan Coatsworth, head of markets at AJ Bell, said in a note on Friday morning that the 30-year gilt yield is a better measure of political sentiment than the 10-year benchmark rate, because the UK government typically issues long-term debt.
“The 30-year gilt remained steady at 5.628%, having traded at 5.8% earlier this week, compared with 5% just three months ago,” he said.
“The election results have fueled speculation that Keir Starmer may struggle to remain as Prime Minister. Bond markets have been spooked by the prospect of political change as the apparent challengers, Angela Rayner and Andy Burnham, could push for more government borrowing and spending, pushing gilt yields even higher.”
The UK already has the highest government borrowing costs in the G7, with its 10-, 20- and 30-year debt yields above the crucial 5% threshold. Yields effectively represent the interest paid by the government to investors who hold the debt.
“Politics really matters for yields,” Freya Beamish, chief economist at TS Lombard, told CNBC’s “Squawk Box Europe” on Friday, adding that it will be difficult for the Labor Party to reverse “growth budget” policies against a backdrop of rising prices and economic constraints.
“The gilt market will certainly react poorly to ‘let’s fight our way out of this’ without dealing with any waste, or ‘let’s cut taxes’, which would be a kind of growth policy, but you can’t just go for growth policy without dealing with the waste on the spending side of the ledger,” she said.
“And we know there must be some kind of waste – even as a percentage of GDP, many departments and many types of government spending are now higher than before Covid.”
Nigel Green, CEO of financial consultancy Deavere Group, told CNBC on Friday morning that gilt markets “pay very close attention to political authority, particularly when governments are already facing difficult financial circumstances.”
“Rachel Reeves is politically tied to Starmer on the economy,” he said. “If gilt yields remain under pressure while Labor suffers heavy election losses, investors may begin to conclude that the government is becoming politically weak as well as financially constrained.”
Jonathan Merchant, fund manager at UK-based Mattioli Woods, told CNBC that the early indication was that “it’s likely to be a tough day for Keir Starmer.”
“Given the rise in tensions in the Middle East overnight and the related impact on oil and inflation, it is challenging to sort out market sentiment regarding local elections,” he said. “Gilt yields fell slightly at the open, as the market appears to be worried that the outcome for Labor will be slightly worse due to the local elections.”
Merchant said Starmer “has remained determined in recent weeks and probably wants to fight.”
“In fact, we may see an acceleration in the pace of policy change efforts,” he told CNBC. “However, the question for markets is: ‘In which direction?’ A move further to the left is likely to appease back benchers and prevent internal opposition and although this would be more favorable than a leadership change, it is not something the market would welcome.
