Political instability in the UK causes government bond yields to soar, and the value of the British pound fluctuates.

The ruling Labour Party in the UK is shaken by the issue of Prime Minister Keir Starmer’s future, causing significant fluctuations in UK government bond yields and the pound exchange rate on the 15th. As political uncertainty intensifies, concerns grow that the government’s fiscal operations may change direction, and this unease is first reflected in the bond and foreign exchange markets.

This chaos began after a disastrous local election defeat on the 7th. With increasing pressure for Starmer to resign, even discussions about a leadership election within the Labour Party have started to emerge. Potential successors mentioned include Greater Manchester Mayor Andy Burnham, former Health Secretary Wes Streeting, and former Deputy Prime Minister Angela Rayner. Once the ruling party’s leadership wavers, the continuity of economic policies is inevitably weakened, and markets are keenly watching this development.

That morning, the yield on 10-year UK government bonds was 5.12%, up 0.13 percentage points from the previous trading day. This is nearly flat compared to the 5.13% level reached on the 12th, approaching the highest point since the 2008 financial crisis. Previously, the yield on 30-year bonds also rose to its highest level since 1998. The pound exchange rate briefly fell to 1 GBP = 1.3335 USD during trading, hitting a five-week low, before partially rebounding to 1.3354 USD. Bloomberg reported that if this trend continues, the weekly increase in UK 10-year bond yields could be the largest since March, and the weekly decline in the pound could be the biggest since 2024.

A particularly watchful market figure is Mayor Burnham, who has been mentioned as a strong contender. Last year, he proposed higher taxes on the wealthy, large-scale nationalization of corporations, and expanded borrowing and fiscal spending. For investors, these commitments could increase government deficits and the burden of bond issuance, raising concerns. Jefferies strategist Mohit Kumar told Bloomberg that markets worry Burnham might choose a more left-leaning path and expand fiscal deficits. According to a representative of a FTSE 100-listed company cited by the Financial Times, Prime Minister Starmer and Chancellor Rachel Reeves remaining in their positions would be better, and while the current leadership is also not exactly pro-business, other options seem to pose greater risks to the economy.

The sensitivity of the UK financial markets is rooted in the already expanded national debt burden. The Financial Times pointed out that major countries are increasingly watching bond markets due to rising debt levels, and the UK is no exception. This means that as long as the government slightly deviates from fiscal principles, markets may respond with rising bond yields—i.e., increased government borrowing costs. A Labour Party insider said that this leadership contest is essentially the first election where the bond market has been given voting rights, reflecting this background. CEOs are also increasingly vocal in their dissatisfaction. Martin Sorrell, chairman of advertising firm S4 Capital, said that the shake-up of the prime ministership damages the UK’s external credibility; other senior executives criticized the government for being preoccupied with internal conflicts and scandals rather than policy implementation. During the King’s speech opening Parliament on the 13th, several economic bills, including the Financial Services Promotion Act, were introduced, but the future leadership race could cause uncertainties in the legislative schedule and policy progress. This trend could mean that if the Labour Party’s power structure is not clarified quickly, volatility in UK asset markets will further increase, potentially testing the government’s fiscal credibility and the implementation of growth policies.