British Prime Minister Keir Starmer speaks at the start of a Cabinet meeting to mark the fourth anniversary of Russia’s full-scale invasion of Ukraine, at Downing Street in London, Feb. 24, 2026.
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LONDON — The cost of long-term borrowing for the British government is at its highest in nearly 30 years, as the country’s influential bond market braces itself for an election that could determine the fate of Prime Minister Keir Starmer.
Voters will elect more than 4,800 local council representatives on Thursday, which is expected to cost the ruling Labour party as many as 2,000 seats — and deal a blow to Starmer’s already shaky leadership.
Votes are expected to shift in favor of right-wing Reform UK and the left-wing Green Party. CNBC has reached out to the government for comment.
Yields on U.K. government bonds, known as gilts, spiked on Tuesday, amid reports that a group of Labour lawmakers is planning to demand Starmer either resign or set a date for his departure from office. Backbench MPs — parliamentarians without a position in government — are reportedly planning to blame looming losses in the local elections on the prime minister.
By 1:45 p.m. in London (8:15 a.m. ET), the yield on the benchmark 10-year gilt was 12 basis points higher at 5.082%, putting it at its highest level since 2008. The yield on the 30-year gilt added 11 basis points to settle around 5.76%, its highest level since 1998.
Yields on 20-year gilts also surged by around 14 basis points to hit a 28-year high.
Bond prices and yields move in opposite directions.
Long-term gilts
Starmer and his finance minister, Rachel Reeves, have already warded off discontent within their own ranks surrounding their fiscal policies, welfare reforms, and the appointment of Peter Mandelson — an associate of the late sex offender Jeffrey Epstein — as ambassador to the United States.
Health Minister Wes Streeting, former Deputy Prime Minister Angela Rayner and Greater Manchester Mayor Andy Burnham are widely reported to be among the top contenders to replace Starmer. Rayner and Burnham — who is currently ineligible to stand as prime minister because he lacks a seat in parliament — are broadly considered more left-leaning than Starmer.
Markets ‘won’t shrug off heavy Labour loss’
Nigel Green, CEO of financial consultancy deVere Group, told CNBC via email that the gilt market “will not shrug off a heavy Labour loss in the local elections.”
“Investors will read it as a signal about leadership strength and fiscal discipline, not just politics,” he said, adding that markets will be focused on what the outcome means for Reeves’ position.
“She’s meant to be the economic credibility anchor,” Green said. “If her authority weakens or political pressure forces a softer stance on spending, yields move higher, especially at the long end where supply risk sits; 10- to 30-year gilts are going to bear the brunt as investors demand a higher term premium.”
Last July, gilt yields surged after Reeves was seen crying in parliament amid reports that her role in Starmer’s cabinet was in jeopardy. It came after the government U-turned on her ‘ proposed welfare cuts following a rebellion from Labour politicians.
The U.K. already has the highest government borrowing costs in the G7, with its 10-, 20- and 30-year debt commanding yields above the critical 5% threshold.
Green told CNBC that against its current macroeconomic backdrop, the U.K. “doesn’t have much room for error.”
“Growth is weak, borrowing is elevated, and inflation pressures linked to energy remain, meaning even a small dent in credibility forces a repricing,” he warned. “Investors price probability. If the odds of looser fiscal policy increase, whether through pre-election tax cuts, spending commitments, or diluted fiscal rules, gilts [will] adjust immediately.”
In 2022, then-Prime Minister Liz Truss’s so-called “mini budget” — a raft of unfunded tax cuts — sparked a crisis in the gilt market when yields surged in response and prompted emergency intervention from the Bank of England. The bond market reaction to Truss’ policies hit pension funds and sent mortgage rates skyward, ultimately resulting in her resignation just 44 days into her term.
DeVere’s Green noted that for gilt investors, “memories of the Truss mini-Budget are still fresh.”
“It wouldn’t take a shock of that magnitude to move markets again. A shift in expectations is enough,” he added.
Gilt market turbulence ‘hard to stomach’
Nicolo Bragazza, associate portfolio manager at Morningstar Wealth, also noted that political uncertainty had negatively contributed to gilts’ performance.
“Political uncertainty has become a feature of the U.K. treasury market and this is reflected in higher risk premia, especially in the long end of the curve,” he said. “If elections were to heighten government instability we could expect some negative pressure on U.K. bonds and the pound.”
Bragazza urged investors to focus on long-term fundamentals over “short-term noise” or trying to predict the political consequences of this week’s elections.
“Yields remain attractive on a historical perspective, political uncertainty is already reflected in prices, and the Bank of England is moving prudently as it shows its commitment to rein in inflationary pressures,” he said.
“Although we continue to keep a close eye on political developments and geopolitical risks stemming from the situation in the Middle East, we remain constructive on U.K. treasuries over the long-term.”
London-based Chris Iggo, chief investment officer for core investments at BNP Paribas Asset Management, said the U.K.’s quick succession of prime ministers in recent years has damaged sentiment in the bond market.
Starmer is the fifth prime minister to take office in the U.K. over the past decade.
Iggo told CNBC’s “Squawk Box Europe” last week that the “lack of stability” and strategy on fiscal outlook was “damaging sentiment in the gilt market.”
“I like gilts. I think the yields are attractive, but the volatility is quite hard to stomach,” he added.
