UK borrowing costs surge as Burnham leadership fears hit markets
Higher gilt yields and a weaker pound pushed up the cost of UK debt, raising the risk of pricier mortgages, weaker pensions and tighter public spending.
Higher mortgage costs, a weaker pound and rising pressure on public finances are landing at the same time, and the market message was blunt: political turmoil in Labour is starting to look expensive for households. As investors sold UK government debt, the 10-year gilt yield rose above 5.17% on Friday, its highest level since 2008, while the 30-year yield climbed to 5.84%, a 28-year high and the highest since 1998.
That matters well beyond Westminster. Higher gilt yields feed through into the cost of government borrowing, which can influence everything from future tax decisions to the room available for schools, hospitals and welfare. They also tend to lift the price of new fixed-rate mortgages and add pressure to pension portfolios that hold long-dated bonds. At the same time, sterling weakened, with the pound down 0.3% against the dollar at about $1.336 and 1.5% lower for the week, leaving it on track for its worst week since the aftermath of Rachel Reeves’s first budget in November 2024.
Markets have been reacting to Labour’s leadership turmoil and to Andy Burnham’s decision to fight a by-election and return to Westminster. Analysts said the moves reflected concern that a Burnham-led government could mean looser fiscal policy, higher borrowing and a shift away from the current commitment to restraint. Burnham has previously said the government was “in hock” to the bond markets, and he has suggested putting defence spending outside the Chancellor’s fiscal rules.
The political backdrop intensified after days of pressure on Sir Keir Starmer following Labour’s poor local election performance. Reuters reported on May 12 that long-term UK borrowing costs had surged to nearly 30-year highs as traders priced in the risk of a leadership change that could weaken fiscal discipline. Sky News said 10-year borrowing costs reached 5.12% on May 12, the highest since July 2008, while 20-year yields hit 5.75% and 30-year yields topped 5.8%, levels not seen since 1998. Bloomberg said investors were pricing in the chance that Starmer could be replaced by a more left-leaning figure who might loosen Labour’s fiscal rules.
George Cole at Goldman Sachs warned that political and fiscal risks could re-emerge, especially if the debate turns to higher defence spending or other commitments that do not fit current fiscal rules. Jefferies economist Mohit Kumar said Burnham’s move had raised concerns about a shift to the Left and higher deficits. Russ Mould of AJ Bell said Burnham’s comments had helped push UK borrowing costs higher and the pound lower, while Kathleen Brooks of XTB said Burnham looked like the least market-friendly of the leadership contenders. The UK has also stood out against other European bond markets, with broader pressure from higher oil prices and inflation worries linked to the Iran war adding to the strain.
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