The British pound, stocks and markets are in turmoil. U.K. Prime Minister Keir Starmer is battling to save his job, and the prospect of yet another leadership change is spooking the U.K.’s government debt market.
The yield on the 10 Year Gilt rose 9 basis points to 5.09% on Tuesday. The yield on the 30 Year Gilt jumped 9 basis points to 5.76%, hitting its highest level since 1998.
Stocks and the pound were also suffering. London’s flagship FTSE 100 index slid 0.4%, while sterling dropped 0.5% against the dollar to trade at $1.35.
Starmer sought to quell an internal rebellion on Tuesday after more than 80 lawmakers from the ruling Labour Party called for him to quit. The prime minister told his cabinet that he would “get on with governing” following brutal losses in local council and mayoral elections last week.
Even if Starmer’s premiership survives this, his days look numbered. Users of the online prediction market Polymarket think there’s a 79% chance Starmer has left 10 Downing Street by the end of the year.
(Polymarket has a data sharing partnership with Dow Jones, the publisher of Barron’s.)
But even though Starmer’s departure is starting to feel inevitable, the timing will matter for the market.
Some lawmakers want him to quit now—raising the odds that a centrist candidate such as health secretary Wes Streeting would be able to see off a leadership challenge from Manchester Mayor Andy Burnham.
Burnham is seen as a front-runner to be the next prime minister, but he can’t run right now because he isn’t a member of parliament. Many left-wing Labour MPs want Starmer to stay on until Burnham is able to secure a seat in the House of Commons.
So-called bond vigilantes have kept British fiscal policy in check ever since Conservative Prime Minister Liz Truss’s disastrous September 2022 mini-budget, which sent gilt yields soaring and caused the pound to plummet. Starmer and his finance minister Rachel Reeves have made balancing the books a priority, even though that has proved unpopular with voters.
But Burnham said in September that the government shouldn’t be “in hock” to the bond market, signaling that he would support freer spending if he became prime minister. It’s likely that gilt yields would spike if he succeeded Starmer, raising the risk that the turmoil could spill over into the U.S. Treasury market.
The longer Starmer clings onto power, the more likely it is that Burnham will be able to return to parliament. The best result for investors might be a swift exit.
Write to George Glover at george.glover@dowjones.com