Bond markets brace as UK PM Starmer's political rivals break cover, heath sec. Streeting resigns

Bond traders are bracing for more U.K. instability as Prime Minister Keir Starmer could be formally challenged by rivals on Thursday, as he clings to power.

Health Secretary Wes Streeting has resigned, saying he no longer has confidence in the prime minister, and is widely expected to launch an imminent leadership bid.

In his resignation letter, Streeting told Starmer it was "now clear that you will not lead the Labour Party into the next general election", citing last week's "unprecedented" local council election losses.

Separately, Starmer's former deputy Angela Rayner has reportedly been cleared of deliberate wrongdoing over her tax affairs, boosting her prospects for another potential leadership bid.

Supporters of a popular third contender, Greater Manchester Mayor Andy Burnham, are said to pressing the Labour Party's governing body to extend the timeline for any forthcoming leadership election so that the he can seek the seat in parliament he would need to run for the leadership.

A Labour leadership election can only be triggered if the leader resigns, or if 20% of MPs nominate a challenger, meaning 81 Labour lawmakers would need to back an individual bid.

Competing leadership bids could create division among lawmakers over who to back to replace Starmer, who has vowed to fight on.

While Streeting is seen as more of a centrist continuity candidate, Rayner and Burnham lean more to the left — a factor that has rattled U.K. bond markets and sent borrowing costs higher, with investors fearing a more left-leaning prime minister could herald more borrowing and public spending, and higher debt.

While 94 MPs have called on the PM to resign, 161 have backed Starmer to remain in office and fear the instability a leadership race would cause. One of his most prominent allies, Chancellor Rachel Reeves, told the BBC earlier Thursday that such a contest "would plunge the country into chaos."

The yield on the benchmark 10-year bond — or gilts as they're known in the U.K. — stood at 5.028%, down 4 basis points, as of midday London time, while the interest rate on the 30-year gilt hovered around 5.695%, down 6 basis points.

At their current level, U.K. bond yields were a reflection of the uncertainty around the U.K. — and things could get worse, analysts warned.

"Everything seems to be aligning for a leadership contest that will unease bond investors," Neil Wilson, Saxo UK investor strategist, noted.

"Health Secretary Wes Streeting has a big decision today to pull the trigger. It's been a volatile week for gilt markets and I expect this to continue and likely see yields print fresh multi-decade highs should a leadership contest occur," he said in emailed comments Thursday.

The government got a rare bit of good news earlier Thursday, with growth data showing the economy expanded 0.6% in the first quarter.

That will be cold comfort to investors, however, with the Iran war, global energy crunch and domestic political crisis combining to make the outlook for the economy, inflation and growth even more confused.

"It's difficult to see this first‑quarter momentum being sustained through the rest of the year with uncertainty rising at home and abroad," Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said via email Thursday.

He added: "The first quarter showed that strong U.K. economic growth is possible but many will be unconvinced that this momentum can be sustained throughout this year. The risk is that the energy price spike following the start of the Iran conflict will persist and lead to a rebound in inflation.

"This would be especially painful for businesses and consumers who have already faced years of higher prices and elevated interest rates."