Political instability and inflationary pressures continue to unsettle investors despite PM's address
Gilt yields have remained stubbornly high following Prime Minister Keir Starmer's address to the nation, with 10-year yields nudging back towards 5% and longer-dated government debt holding above 5.6% — levels not seen since the late 1990s.
Starmer's speech was intended to quell internal Labour dissent following bruising local election results, in which Reform UK made substantial gains. The prime minister acknowledged past missteps and pledged more decisive action, but the response from bond markets has been muted.
"Keir Starmer's address to the nation hasn't done the trick of calming bond markets," said global financial commentator Susannah Streeter (pictured right). "There is still a sense of jitters playing out as concerns about political instability collide with inflationary fears prompted by the ongoing conflict in the Middle East.
"His speech was designed to project a 'keep calm and carry on' message, but the worry is that it lacks the real substance needed to keep Labour MPs on side."
Streeter, who is also the chief investment strategist at Wealth Club, noted that a change of leadership could destabilise fiscal policy. "The concern is that a change of Prime Minister would prompt wider turmoil at the top of government," she said.
"It could see the Treasury's focus on adhering to fiscal rules derailed if a new guard is brought in to pacify Labour's rank and file. Political turbulence is never a good look for a nation that needs to project stability in order to attract long-term investment."
The implications extend beyond Westminster. Higher gilt yields tighten the government's fiscal headroom, limiting its capacity to support households in regions facing potential job losses. Analysis from the EY Item Club identifies Humber and South Wales as areas facing significant employment pressures linked to the Middle East conflict.
Sustained elevated gilt yields push up swap rates and, in turn, fixed-rate mortgage pricing — a pressure that shows little sign of easing while political uncertainty continues.
"Right now, with clamour for Starmer's replacement continuing off the back of highly fractious local election results, the UK is back in the instability spotlight," Streeter said. "The rise in gilt yields makes the government's position even trickier, given that it further constrains its ability to support households in areas likely to be hardest hit by the Middle East conflict.
"Both Humber and South Wales have seen a surge in votes for Reform UK, a trend which has helped fuel the latest crisis facing the Prime Minister. The political challenge is increasingly becoming an economic one, with markets demanding ever greater reassurance. The longer doubts persist over the government's stability, the greater the risk that market anxiety perpetuates the problem."
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
