UK bond yields hit peak since 1998 due to risk of PM's resignation

The yield on long-term government bonds of Great Britain rose on May 12 to the maximum in this century, reported the Financial Times. Overall, the cost of borrowing for the British government was at its peak since 2008, CNBC reported.

The yield on 30-year UK government bonds added 12 basis points at its peak to reach 5.79%, the highest since 1998, the FT reports. Bond yields rise when their prices fall.

In parallel with the fall in bond prices, the national currency also came under pressure: the pound sterling weakened by 0.4% against the U.S. dollar, falling to the level of $1.355, the newspaper added. Relative to the euro, the pound declined by 0.3% and reached the lowest level since late April, Bloomberg noted.

British bond yields and the pound sterling are falling for the second day in a row: investors are cautious because of the growing pressure on Prime Minister Keir Starmer within his Labor Party. As Bloomberg writes, the market fears that the possible resignation of Starmer and Chancellor of the Exchequer Rachel Reeves will lead to a reversal of the policy of restraining government spending. The new leadership may resort to increased borrowing to regain the confidence of voters after the historic defeat of the party in local elections.

"Markets are increasingly having to lay down the near-term risk of power transit and the uncertainty this creates for fiscal policy," said Evelyn Gomez-Liechty, a multi-asset class strategist at Mizuho International (quoted by Bloomberg).

Political instability has added to the economic fallout from the US war against Iran, which has accelerated inflation and threatened public finances, the FT added.

Management firm Schroders has advised staying away from British government bonds, citing the risk of Starmer's ouster, Bloomberg adds.

This article was AI-translated and verified by a human editor