UK Government borrowing costs climbed sharply on Friday morning as fresh concerns over political turmoil sent shockwaves through bond markets and weighed on sterling.
Yields on 30-year gilts jumped 12 basis points to reach 5.774 per cent, approaching levels not witnessed in nearly three decades, as Prime Minister Sir Keir Starmer faces an intensifying threat to his leadership.
The pound also came under selling pressure, dropping as much as 0.4 per cent against the dollar before stabilising around 0.3 per cent lower at $1.336
Ten-year gilt yields experienced a further sell-off, rising 11 basis points to 5.104 per cent and remaining firmly above the five per cent threshold.
Borrowing costs are on the rise as markets price in an Andy Burnham premiership
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Potential challengers within the Labour Party are now manoeuvring into position ahead of what could become a formal contest for the top job with Greater Manchester Mayor Andy Burnham expected to put himself forward in the upcoming Makerfield by-election.
Labour MP Josh Simons' decision to leave the seat, following Wes Streeting's resignation as the Government's Health Secretary, has given Mr Burnham another opportunity to return to Westminster.
The mayor is widely viewed as the biggest internal threat to Sir Keir's premiership, polling favourably against the beleaguered Prime Minister after last week's brutal council election results.
When gilt yields rise, bond prices move in the opposite direction, meaning investors demand higher returns to lend to the Government. London's leading share index also suffered, with the Ftse 100 falling 0.8 per cent to 10,288.7 during early trading.
Government borrowing is on the rise in response to the political turmoil
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30-year gilts surged this morning
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Political uncertainty combined with inflation worries linked to the ongoing Iran conflict to drag equities lower. Oil prices added to market jitters, climbing two per cent to exceed $107 per barrel as prospects for resolving the US-Israel war on Iran remained distant.
Chris Beauchamp, chief market analyst at IG, said investors were growing anxious about the prospect of a leader further to the left taking charge of the government.
He pointed to Greater Manchester Mayor Andy Burnham securing a route back to Westminster after a Labour MP vacated their seat.
Mr Beauchamp said: "Andy Burnham's long quest to find someone to make space for him in Parliament has finally succeeded, but the prospect of the 'King in the North's' return has not been good for UK borrowing costs. Worries about higher spending commitments have seen investors take flight from UK bonds."
The Ftse fell back into the red this morning
|He warned the yield surge was "particularly grim news" for an economy already confronting a potential energy crisis that could undermine growth.
Susannah Streeter, chief investment strategist at Wealth Club, noted that Burnham must first secure victory in a by-election, suggesting any leadership battle would prove lengthy and unwieldy.
She said: "Another bout of political infighting, with yet another Prime Ministerial shuffle under way is hardly a good look for a country which needs to portray stability to attract investment."
Former deputy prime minister Angela Rayner has also seen her path to a potential challenge cleared after HMRC confirmed she had not deliberately acted wrongly regarding her tax affairs.