“Any sign of instability around Prime Minister Keir Starmer or pressure on Chancellor Rachel Reeves immediately feeds into concerns about whether fiscal discipline could weaken,” he said. “If Labour suffers a heavy defeat and internal divisions intensify, gilt markets will start assigning a higher probability to looser fiscal policy, whether through increased spending, diluted rules, or political concessions.”
The UK enters this political flashpoint with limited room for manoeuvre. Public debt remains close to 100% of GDP, borrowing continues at elevated levels, and gilt issuance is expected to exceed £250 billion this fiscal year.
Attention is likely to centre on the long end of the yield curve, where maturities between 10 and 30 years are most exposed to concerns about supply and long-term fiscal sustainability. “The long end is where the damage showed up during the Liz Truss episode, and it is where it would show up again,” Green said. “Investors demand a higher term premium when confidence slips, and that drives yields sharply higher in those maturities.”
Sterling is also in focus. Green warned that any erosion of confidence linked to leadership uncertainty or fiscal loosening would likely weaken the pound, feeding imported inflation and reinforcing upward pressure on gilt yields. “Currency and bonds move together in these situations,” he said. “A weaker pound lifts inflation expectations, and that pushes gilt yields higher. It becomes a feedback loop that is difficult to contain once it starts.”
“The combination of a potentially massive electoral setback, an organised push against Starmer, and questions over how firmly Reeves can hold the fiscal line creates a clear risk signal for UK bond markets. If those pressures build after the vote, gilt investors will move quickly, pricing in higher borrowing, demanding greater compensation for risk, and pushing yields higher in a way the UK can ill afford.”