Bond market anxiety pushes up UK government borrowing costs after Starmer’s reassurances fall short

UK 30-year bond yields rose 8 basis points to 5.65% amid political jitters, as investors reacted to growing uncertainty about the future of Keir Starmer’s government and the potential for a broader shake-up of fiscal policy.

Bond yields, the effective interest rate the government pays to borrow, move inversely to bond prices. When yields rise, it signals that investors are demanding a higher return to hold UK debt, reflecting a fall in demand for gilts. This directly increases the cost of government borrowing, a significant problem given that UK public debt already exceeds £2.7 trillion. The yield on 30-year bonds rose from 5.57% on Friday night to 5.65% on Monday morning, before creeping further to 5.67% later in the day – taking it close to the 28-year high of 5.78% hit last week.

Benchmark 10-year bond yields also rose, climbing by 6 basis points and briefly hitting the 5% milestone for the first time since last Wednesday. Shorter-dated gilts, which are more sensitive to short-term inflation risks, also weakened, with yields on two-year and five-year bonds rising by around 8 basis points – larger moves than equivalent US bonds.

Political instability drives market unease

The sell-off in gilts gathered pace after Labour MP David Smith called on Starmer to set a timetable for his departure, arguing the government needed “to act faster, and be more radical”. His remarks followed a challenge to the prime minister announced over the weekend by Labour MP Catherine West, who said she wanted Starmer to set a timetable of September for an orderly departure.

Starmer’s address to the nation, intended to project a “keep calm and carry on” message, failed to calm bond markets. Yields were higher immediately before and after his speech, suggesting traders saw little substance in his pledge to fight any leadership challenge.

Susannah Streeter, chief investment strategist at Wealth Club, said there were concerns in the bond markets that a change of prime minister would prompt wider turmoil at the top of government and less focus on fiscal rules. “His speech was designed to project a ‘keep calm and carry on’ message, but the worry is that it lacks the real substance needed to keep Labour MPs on side,” she wrote. Streeter noted that ten-year gilt yields had nudged 5% once more, while longer-dated debt remained above 5.6% – levels not sustained since the late 1990s.

Enrique Díaz-Alvarez, chief economist at global financial services firm Ebury, argued that the pound had weathered the local election results well, with sterling down just 0.2% so far that day. He said investors were betting that Labour’s overwhelming defeat would not end Starmer’s premiership just yet, but added that pressure on the prime minister looked set to intensify. “A potential lurch to the left is what markets fear most, as this could mean higher taxes, heavier gilt issuance and a broader fiscal risk premium baked into UK assets,” he said.

Kathleen Brooks, research director at XTB, described the bond market as “relatively stable” after Starmer came out fighting, but noted that yields were moderately higher. “For now, it looks like the market is not taking Angela Rayner’s proposal for how to reinvigorate the economy and Labour’s chances seriously,” she said. Brooks added that traders did not yet believe the threat to Starmer would materialise, but warned that “a bigger blow” could send yields higher.

Broader economic headwinds

Concerns about political instability are colliding with inflationary fears partly driven by the ongoing conflict in the Middle East. Bank of England policymaker Megan Greene, one of the more hawkish members of the monetary policy committee, told Bloomberg’s Odd Lots podcast that it was worth waiting “a little while” to see how the Iran war unfolded before deciding whether to raise interest rates. “We’ve now had a negative supply shock, an energy shock, and that stands to push inflation up and growth down, which is a terrible situation for a central banker to be in,” she said. The Item Club has predicted the UK economy could shed 163,000 jobs this year as a result of the fallout.

On the stock market, the FTSE 100 rose 29 points (0.3%) in early trading, supported by banks and oil companies, while European indices fell, with France’s CAC 40 down 0.75% and Germany’s DAX losing 0.2%.

British Steel to be nationalised

In his speech, Starmer confirmed that the government will bring forward legislation this week to give ministers powers, subject to a public interest test, to take full national ownership of British Steel. The prime minister described steel as “the ultimate sovereign capability”. The move follows the government taking control of the Scunthorpe plant last April after its Chinese owner, Jingye, was reportedly planning to shut down the site. The GMB union welcomed the announcement, with national secretary Charlotte Brumpton-Childs saying: “British Steel is a nationally strategic asset, it is right the government does everything in its power to secure its long term future.”

E.ON to acquire OVO Energy

In the energy sector, Germany’s E.ON has agreed to buy rival OVO to create one of Britain’s largest suppliers, serving nearly one in seven UK households and businesses, plus OVO’s four million home energy customers. E.ON said existing tariffs would be honoured and service would continue unchanged. Chris Norbury, CEO of E.ON UK, said the deal would create a retailer with the capability and customer base to make “new energy work for everyone”. Chris Houghton, CEO of OVO, said scale and access to long-term capital for the energy transition had become “non-negotiable”.

Telecoms complaints surge over mid-contract price rises

The telecoms regulator Ofcom has received more than 100,000 complaints from O2 and Sky Mobile customers angry over surprise mid-contract price rises. Complaints about O2 more than tripled quarter-on-quarter in the first three months of the year, soaring from two per 1,000 customers to seven per 1,000 – the highest rate among mobile operators. O2, owned by Virgin Media O2, announced in October that mobile bills would rise by £2.50 a month (£30 a year) for all customers, 70p more than the £1.80 increase customers were told when signing up. The move sparked a rebuke from the chancellor, Rachel Reeves, and technology secretary Liz Kendall, and O2 lost 165,000 customers in the fourth quarter last year, with about 110,000 attributed directly to the price increases.

Sky Mobile received five complaints per 1,000 customers, up from three per 1,000, after announcing a £1.50 monthly increase (£18 a year) – its first mid-contract mobile price rise in more than seven years. Ofcom’s director of consumers and retail markets, Cristina Luna-Esteban, said: “It is disappointing to see an increase in customer complaints during this quarter … a main driver of these complaints appears to be unexpected mid-contract price rise announcements for some mobile customers in the autumn of 2025.” From January 2025, Ofcom banned mid-contract price rises linked to inflation and required providers to state any future price rises in “pounds and pence” upfront at the point of sale.