UK government borrowing costs hit 28-year high as investors fear left-wing Labor move

British borrowing costs rose to a 28-year high yesterday as fears of a left-wing Labor coup spooked bond markets.

Investors dumped British bonds as leadership speculation mounted ahead of tomorrow’s local elections.

A defeat for Labor will stoke fears of a challenge to Sir Keir Starmer from the likes of Angela Rayner, Andy Burnham or Wes Streeting, with Ed Miliband potentially taking on the role of Chancellor.

Markets fear this could fuel calls for a relaxation of financial rules that limit spending and borrowing.

That comes on top of concerns gripping bond markets around the world due to the war with Iran.

But it is British bonds, known as gilts, that have borne the brunt of the sell-off.

Investors fear that a new Prime Minister like Angela Rayner could turn on the spending taps

Yields on government bonds, which rise as their prices fall, rose yesterday to 5.79 percent, the highest level since 1998. Ten-year government bond yields rose to more than 5.1 percent, heading toward March highs not seen since the 2008 financial crisis.

Both are above 2022 levels in the wake of Liz Truss’s disastrous mini-Budget – an episode that Labor repeatedly used as an electoral weapon on its way to power two years later.

The yield on government bonds is essentially the return that investors demand for loans to the government. When these rise, it means the government has to spend more to finance its spending plans.

That reduces the “wiggle room” Chancellor Rachel Reeves has to meet budget rules that require her to try to reduce borrowing and debt.

Britain is already saddled with the highest borrowing costs among the G7 group of advanced economies, thanks to persistently high inflation and skyrocketing government debt.

Tory shadow chancellor Sir Mel Stride blamed the ‘increasingly weak and chaotic Labor leadership’.

He added: ‘Reeves and Starmer have borrowed heavily while taxing the life out of our economy, and we pay well over £100 billion a year just to cover the interest on our debts.

‘The country is paying the price for Labour’s recklessness.’

The unrest comes at a time when International Monetary Fund (IMF) officials in Britain are believed to be in charge of the economy ahead of their annual review, with the cost of British borrowing likely to be among their biggest concerns.

Danni Hewson, head of financial analysis at investment platform AJ Bell, said: ‘The prospect of a period of political unrest is taking its toll in Britain.

‘Yields on 30-year government bonds have shot up… as investors wonder what impact fiscal policy could have if a massive Labor drubbing in this week’s local elections results in a vote of no confidence for Keir Starmer.

“A new prime minister would likely mean a new chancellor, and one who might be more inclined to turn on the spending taps at a time when the country faces stagnant growth and a new cost-of-living crisis.”

The rise in bond yields “is a symptom of nerves about rising inflation as the situation in the Middle East remains very uncertain,” Ms Hewson said.

But she added: ‘It is being felt more acutely in Britain as the country has proven more sensitive to energy price shocks.

‘It’s not just numbers on a spreadsheet, but it makes doing business more expensive for the government and increases the interest paid on the huge debt pile created during the recent economic problems. This limits what can be done by a sharp new broom sweeping through Downing Street.”

The latest market turbulence came as fears of an end to the fragile US-Iran ceasefire grew over the weekend, resulting in further oil price volatility.

That caused bond yields to rise in the US and across Europe on Monday. The sharp move for government bonds yesterday was partly due to Britain catching up after UK markets closed the day before for the Bank Holiday, but experts said this also reflected growing nerves over politics.

Thomas Pugh, chief economist at accountancy firm RSM UK, said: ‘There is a growing risk that Britain moves from an energy crisis straight into a political crisis, resulting in a new period of uncertainty and even higher borrowing costs.

‘This would almost certainly make 2026 another year of stagnation for the UK economy and increase the chance that the economy will enter a recession.’