British Prime Minister Keir Starmer leaves Downing Street in London, England, on February 2, 2026.
Alicia Abodunde | Getty Images News | Getty Images
British Prime Minister Keir Starmer has ignored calls to resign, but an analyst has warned that a “Sword of Damocles” hangs over the influential bond market until a successor is clear.
Pressure on Starmer has increased amid criticism of his decision to appoint Peter Mandelson as ambassador to the United States in 2024, despite Mandelson’s links to disgraced financier and sex offender Jeffrey Epstein.
The release of millions of new emails and files related to Epstein has shed new light on Mandelson’s relationship with Epstein, who died in prison in 2019.
The government’s borrowing costs soared on Monday as key members of Mr Starmer’s team resigned and his own senior Labor Party politicians called on him to step down.
uk 10 pension
By Tuesday morning, benchmark yields had risen after supporters rallied behind Mr Starmer. 10 pension was 2 basis points lower at 4.509%. 30 year gold coin The yield fell 3 basis points to 5.319%. One basis point equals 0.01%, and yields and prices move in opposite directions.
“Sword of Damocles”
The prospect of a leadership challenge that could reverse the policy path set by Mr Starmer and Chancellor of the Exchequer Rachel Reeves poses a significant risk to gold investors, market watchers said.
If Mr Starmer were to resign, or if a challenger secured enough support to mount a challenge, it would trigger a leadership contest that could last several weeks.
Jordan Rochester, Mizuho EMEA’s head of FICC strategy, said in a note Monday afternoon that if a leadership fight is triggered, Gold Medal could be “exposed to the whims of random political headlines” as the search for a new leader drags on.
“We may not see any action from Starmer this week, but by next week we will be back to trading as usual with CPI and PMI announcements,” Rochester said in a note. “But for many in the market, it’s ultimately just a matter of time, with Starmer’s Labor likely to struggle in the polls in local elections. Until the question is, ‘Who’s next?’ This is like a sword of Damocles hanging over gold leaf traders.”It’s finally resolved. ”
Some local councils across the UK are due to hold elections later this year.
Callum Pickering, chief economist at Peel Hunt, told CNBC’s “Squawk Box Europe” on Tuesday that the bond market wants Starmer and Reeves to remain in their positions.
“Timing is important in politics,” he said of the ruling party, “and Labor seems equally perplexed and afraid of the bond market.”
“What Westminster doesn’t understand that the markets do is that when it comes to fiscal policy, the problem for a developed, rich country like the UK is not debt or deficits, it’s inflation. The UK is an inflation outlier. That’s why we pay a premium in the bond market. The bond market is not an outlier on debt or deficits.”
He said the “major headache” in the bond market would ease as inflation was likely to slow in the coming months.
“I think Starmer will be a bit surprised by how much bond yields have fallen,” Pickering told CNBC. “That’s going to be the case with Labor, and they’re going to say, actually, this prime minister is pretty safe for the time being – so I think he’ll get by.”
Charlie Lloyd, head of investments at Shackleton Advisors, said on Tuesday that a leadership race would “almost certainly” lead to short-term instability in the UK bond market and higher borrowing costs as yields rise.
“Apart from the potential impact on consumer confidence, if gold yields trade at a premium to other bond markets for an extended period of time, the competition could be prolonged and have an economic impact.”
Bond markets have previously signaled support for Mr. Reeves’ voluntary fiscal rules, which require that daily government spending be financed by tax revenue rather than debt, and that public debt as a share of economic output must fall by 2029-30.
Last summer, when Mr. Reeves’ political future was in doubt, gold yields soared as much as 22 basis points in one day, and market watchers said at the time that investors were concerned that his resignation would lead to more government spending and borrowing.
Potential candidates to replace Starmer include the left-wing Angela Ryner, who resigned as deputy prime minister last autumn following a tax scandal, Health Secretary Wes Streeting and former Labor leader Ed Miliband.
Mr Lloyd said much of the anxiety rippled through the gold leaf market stemmed from concerns about potential successors, such as Mr Rayner and Manchester Mayor Andy Burnham, who sit to Mr Starmer’s political left.
If his successor takes office by June, he will be the sixth British prime minister in the last 10 years.
In 2022, gold markets were shaken when then-chancellor Liz Truss announced wide-ranging tax cuts with no funding. This forced the intervention of the Bank of England, and Mr Truss resigned after just 44 days in office.
The UK has the highest long-term borrowing costs of the G7 countries. Among those countries, 20- and 30 years For bonds, only the UK has yields above 5%.
