Bond markets have delivered a stark verdict on Westminster's political drama, showing remarkable indifference to speculation about a potential leadership challenge against Prime Minister Keir Starmer. Despite intense briefing wars and claims that markets would panic if Starmer faced a contest, UK government bonds remained largely unchanged during Wednesday's trading session.
Market Reaction Defies Political Predictions
On Tuesday night, a coordinated briefing campaign from Number 10 officials suggested that bond markets would react violently to any leadership contest against Keir Starmer. Allies of the Prime Minister told journalists that investors would lose confidence in a Labour government without Starmer and Chancellor Rachel Reeves at the helm.
However, when trading began on Wednesday, UK government bonds, known as gilts, showed minimal movement. Thirty-year gilt yields hovered around 5.2 percent, representing an increase of just two basis points from Tuesday's closing price. Similarly, ten-year gilt yields saw only a marginal rise of two basis points, translating into slightly higher government borrowing costs but far from the predicted market rout.
Westminster's Briefing War Escalates
The political tension erupted after several reports emerged on Thursday night indicating that Keir Starmer would fight back against any leadership challenge following the upcoming Budget. In what appeared to be a coordinated effort, Number 10 officials briefed journalists across Westminster that Health Secretary Wes Streeting and other Cabinet ministers were allegedly gathering support among backbenchers for a potential leadership campaign.
Streeting responded forcefully during a morning round of interviews, denying the allegations and criticising the briefing campaign as "totally self-defeating" and "not true". Speaking to Sky News, he stated: "I do think that going out and calling your Labour MPs feral is not very helpful. I do think that trying to kneecap one of your own team when they are out, not just making the case for the Government, but actually delivering the change that we promised, I think that is also self-defeating and self-destructive behaviour."
Budget Concerns Drive Political Nervousness
The fears of a leadership challenge appear to reflect deeper concerns within Downing Street about the upcoming Budget, where Rachel Reeves is expected to break Labour manifesto commitments and raise more than £30 billion in taxes. This has created significant nervousness within government ranks about potential backlash from both MPs and the public.
Meanwhile, there are suggestions that Number 10 strategists worry that advisers and MPs fundamentally misunderstand the importance of financial markets to public finances. In an effort to educate Westminster, economist and former Treasury minister Kitty Ussher recently briefed government officials on gilt markets, arguing that gilt yields remain elevated due to the influence of backbenchers on policies including welfare reforms.
The Real Cost of Market Movements
The Treasury is maintaining close watch on bond market movements ahead of the Budget, given their potential to significantly impact public finances. Small changes in bond markets can cost the government hundreds of millions of pounds, with analysts noting that a recent fall in yields ahead of the Budget could potentially save the Treasury around £2 billion.
According to Office for Budget Responsibility predictions from March, government borrowing costs through debt interest payments were expected to soar above £110 billion over the course of this year. This underscores the critical importance of stable gilt markets for the government's fiscal plans and the delivery of public services.
The market's muted response to political speculation suggests that investors may be focusing more on economic fundamentals than Westminster gossip, providing a reality check for politicians about what truly moves financial markets.
