Newsflash: UK government borrowing costs have risen at the start of bond market trading.
Political uncertainty is gripping the markets, after Keir Starmer was urged to set out an orderly timetable for his departure ahead of this morning’s cabinet meeting.
The yield, or interest rate, on benchmark 10-year UK gilts has risen by almost 10 basis points (0.1 of a percentage point) to 5.1%, up from 5% last night.
Bond yields rise when prices fall, and this morning’s move adds to a rise in borrowing costs yesterday.
Longer-dated borrowing costs have also risen. The yield on 30-year UK bonds has risen by 10 basis points to over 5.77%, very close to the 28-year high (5.78%) set earlier this month.
Michael Brown, senior research strategist at brokerage Pepperstone, says bond investors are concerned about a possible change of prime minister:
double quotation markThe market’s main concern here, and the reason for this Gilt underperformance, is twofold – firstly, that a new PM would shift to the left, and loosen/scrap the UK’s current fiscal rules; and, secondly, that doing so would exacerbate the UK’s inflation problem.
With political uncertainty likely to persist for a while, and the fiscal rhetoric only set to ramp up, those considering buying the dip in Gilts may be minded to wait a while.
Updated at 03.09 EDT
Key events
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FTSE 100 hits lowest since 31 March
The London stock market has opened in the red.
The blue-chip FTSE 100 share index fell by as much as 1.1% at the start of trading, down 117 points to 10,152 points. That’s its lowest level since the end of March.
Banks are leading the fallers; NatWest (-4.6%), Lloyds Banking Group (-4.1%) and Barclays (-4%).
Derren Nathan, head of equity research at Hargreaves Lansdown, says the “seemingly unbreakable diplomatic deadlock between Tehran and Washington” is hurting stocks.
He adds:
double quotation markBack at home, rising government borrowing costs aren’t helping either, with Prime Minister Sir Keir Starmer’s leadership under increasing pressure. The potential for a fiscally looser successor may be weighing on rate expectations, but the inflationary influence of higher-for-longer oil prices is likely to be the bigger driver.
Updated at 03.17 EDT
UK borrowing costs jump after cabinet ministers urge Starmer to quit
Newsflash: UK government borrowing costs have risen at the start of bond market trading.
Political uncertainty is gripping the markets, after Keir Starmer was urged to set out an orderly timetable for his departure ahead of this morning’s cabinet meeting.
The yield, or interest rate, on benchmark 10-year UK gilts has risen by almost 10 basis points (0.1 of a percentage point) to 5.1%, up from 5% last night.
Bond yields rise when prices fall, and this morning’s move adds to a rise in borrowing costs yesterday.
Longer-dated borrowing costs have also risen. The yield on 30-year UK bonds has risen by 10 basis points to over 5.77%, very close to the 28-year high (5.78%) set earlier this month.
Michael Brown, senior research strategist at brokerage Pepperstone, says bond investors are concerned about a possible change of prime minister:
double quotation markThe market’s main concern here, and the reason for this Gilt underperformance, is twofold – firstly, that a new PM would shift to the left, and loosen/scrap the UK’s current fiscal rules; and, secondly, that doing so would exacerbate the UK’s inflation problem.
With political uncertainty likely to persist for a while, and the fiscal rhetoric only set to ramp up, those considering buying the dip in Gilts may be minded to wait a while.
Updated at 03.09 EDT
Investors ramp up bets on Bank of England rate hikes
The City financial markets have lifted their forecasts for UK interest rate rises this year.
The money markets are now pricing in 68 basis points (0.68 of a percentage point) of interest rate increases from the Bank of England by December.
That’s up from 56bps yesterday.
This indicates traders are more confident the BoE will raise interest rates twice this year (which would increase Bank rate by 50bps), and see a third hike as more possible.
That follows a rise in the oil price today (Brent crude is up 1.25% to $105.50 a barrel), which is inflationary.
It may also reflect the political uncertainty (if a new prime minister loosened fiscal policy through higher spending and borrowing, the BoE might respond with tighter monetary policy to dampen the inflation risks).
Investment bank Jefferies’ ‘base case scenario’ is that there is ‘a managed exit’ for Keir Starmer.
Jefferies economist Mohit Kumar told clients this morning that any replacement would likely be left leaning and be negative for the pound, and longer-dated government bonds.
ShareIntroduction: Pound ‘weighed down by political uncertainty’ over Starmer’s future
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Another UK political crisis is looming over the City of London today, as prime minister Sir Keir Starmer faces more calls to set out a timetable for his departure.
The bond market is fimly in the spotlight, after government borrowing costs jumped yesterday as Starmer’s ‘make-or-break’ speech failed to reassure investors, and prompted some Labour MPs to fall for his departure.
The Guardian reported last night that two senior cabinet ministers – Yvette Cooper, the foreign secretary, and Shabana Mahmood, the home secretary – were understood to have told the prime minister he should oversee an orderly transition of power, after last week’s local elections.
The pound has dropped against the dollar this morning, down half a cent to $1.3560.
Sterling is being “weighed down by political uncertainty as PM Keir Starmer faces pressure to step down”, reports IG analyst Tony Sycamore.
City investors will be watching Westminster, where Starmer is due to hold a cabinet meeting today.
Bond yields (which rise when price fall) could push higher if traders anticipate that a change of leadership would lead to higher spending, and more borrowing, and a break from the government’s fiscal rules.
Jim Reid, strategist at Deutsche Bank, explains:
double quotation markWith a Cabinet meeting expected this morning, today could be a big day in determining Starmer’s future.
In response to the uncertainty, 10-year UK gilt yields rose +8.6bps to 5.00% yesterday, whilst the 30-year yield rose +9.3bps to 5.67%, given expectations that a new Labour leader may face pressure to ease the fiscal rules and raise gilt issuance.
The agenda
10am BST: ZEW economic sentiment index for the eurozone
11am BST: NFIB US business optimism index
1.30pm BST: US CPI inflation report for April