One of the UK’s largest pension funds has jumped on the turmoil that speculation over Keir Starmer’s future has unleashed on the gilt market, scooping up government bonds at multi-decade low valuations.
Standard Life has added to its holding of UK government debt, City AM understands, seizing on a sharp dip in the price of the securities that has plunged 30-year gilts to their cheapest this century and taken 10-year coupons to a post-financial crisis low.
In buying up the UK’s government debt, the annuities giant has bucked the prevailing sentiment among investors, who have been furiously dumping UK assets in the face of the political uncertainty set off by last week’s local elections.
“We are beginning to see more attractive relative value emerging at the longer end of the gilt curve,” Nuwan Goonetilleke, chief investment officer at Standard Life, told City AM, referring to the high yield the market is now applying to bonds that mature over a longer time horizon.
Labour suffered one of its worst election results in the party’s 125-year history on Thursday, losing more than 1,000 municipal seats mostly to the insurgent Reform and Green parties. The stark performance immediately triggered a wave of scrutiny on Keir Starmer’s position as Prime Minister. Nearly 100 MPs have now called on him to set a timetable for his departure, while health secretary Wes Streeting is expected to launch a formal leadership challenge on Thursday.
The political imbroglio, just the latest of several to have engulfed Downing Street in the past decade, immediately spilled out onto financial markets, with investors fearful that most successors in the frame would push to loosen the government’s fiscal rules or introduce inflationary policies.
Sterling slid against all major currencies across Monday and Tuesday, in a rare instance where the pound and the price of gilts moved in tandem. Higher interest rates on government debt usually act as a tailwind for a country’s currency, as international investors are drawn in by the higher yield they can accrue from investing in the country’s bonds.
The yield on the 10-year gilt, which has already climbed dramatically since the onset of the Iran war, rose by nearly 20 basis points – or a fifth of a per cent – since the local elections, while sterling fell 0.7 per cent against the dollar. Moves in gilts and sterling far outstripped those in other developed economies, suggesting traders were charging the UK an increasingly large premium for holding its assets on account of both the UK’s political volatility and its outsized exposure to events in the Middle East.
The recent jump in government borrowing costs was first set off by the outbreak of the Iran war. The interest rate on Britain’s sovereign debt has climbed by a full percentage point more or less across the curve since the US’s first air strike on the region, as traders dumped the UK’s state-issued bonds fearful that the closure of the Strait of Hormuz would set off a fresh bout of inflation.
“Global dynamics, particularly energy prices and geopolitics, remain the dominant force, but UK political uncertainty is now starting to feed into gilt pricing at the margin,” Goonetilleke said. “We’re seeing early signs of a risk premium re-emerging, even if still modest. From here, markets will be closely watching both the trajectory of the conflict and clarity on the UK’s political and fiscal outlook.”
Going into the conflict, gilts had been among the best performing sovereign bonds of any major economy in 2026. The Chancellor’s decision to increase the buffer against her fiscal rules and a succession of positive government borrowing figures brought the price of gilts – which moves inversely to their yield – up from historic lows.
Many market participants piled into Britain’s debt as a result, further encouraged by hopes that the Bank of England would cut interest rates several times this year having got a firmer handle on price rises.
