There's a risk of another Liz Truss moment': City raises spectre of bond market meltdown again

"As Starmer's grip on power appeared to be slipping away, the yield in effect the interest rate on 30-year government bonds, or gilts, briefly reached 5.8% on Tuesday, the highest level since 1998, before slipping back after a challenge failed to immediately materialise. However, selling pressure has been maintained on the UK government's bonds relative to its G7 peers, with investors fearing a return to political instability in Britain and a leftwing shift by Labour involving higher levels of borrowing."

"The markets hate uncertainty, but they hate a political vacuum even more. A cabinet resignation followed by a leadership fight would signal that the government is losing control of itself while investors are already questioning the country's fiscal direction. Markets can cope with ideology of any stripe if it is disciplined and coherent. They recoil from programmes that imply materially higher borrowing without a credible growth engine."

"Within Labour ranks many MPs are sanguine, reflecting frustration at a tight approach to tax and spending under Starmer, despite the party's plunging poll ratings and dire showing in elections across Britain last week. The prime minister's allies have sought to argue that avoiding bond market provocation should be reason enough to save him. Others appear willing to put the City's warnings to the test."

"The Merseyside MP Paula Barker, an ally of Andy Burnham, has suggested financial markets would have to fall into line should the Greater Manchester mayor find a route to Downing Street. Meanwhile, the leftwing grandee Diane Abbott"

Borrowing costs rose as investors reacted to potential leadership turmoil, driving a sharp sell-off in UK government debt. The yield on 30-year gilts briefly reached 5.8%, the highest level since 1998, before easing after a leadership challenge failed to quickly materialise. Selling pressure persisted relative to other G7 countries because investors feared renewed political instability and a leftward shift in Labour that could increase borrowing. Investors value disciplined and coherent fiscal plans with credible growth, and they avoid programmes implying materially higher borrowing without a growth engine. Some Labour MPs remained willing to test market warnings, while others argued that avoiding provocation should be enough to keep the prime minister in place.

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