Log In Get Started
Economy May 12, 2026 03:42 AM

UK Borrowing Costs Surge as Starmer’s Position Faces Uncertainty, Sterling Weakens

Yields climb toward multi-decade highs, stocks fall and banks lead losses as leadership doubts weigh on markets

By Derek Hwang

UK government bond yields rose sharply and the pound weakened on reports that Prime Minister Keir Starmer is consulting colleagues about his future after a significant local election setback and resignations by ministerial aides. The 10-year gilt yield jumped to 5.11% and the 30-year yield approached levels last seen in 1998, while the FTSE 100 and major banks slipped amid investor concern about potential changes to the government's fiscal stance.

UK Borrowing Costs Surge as Starmer’s Position Faces Uncertainty, Sterling Weakens

Key Points

  • Political uncertainty around Prime Minister Keir Starmer prompted a sharp rise in UK government bond yields, with the 10-year gilt jumping 11 bps to 5.11% and the 30-year gilt rising to 5.78%.
  • Sterling weakened, falling about 0.5% to $1.354 and to 86.80 pence per euro, while the FTSE 100 slipped nearly 1% and major banks led stock losses.
  • Market participants cited concerns that a change in leadership could undermine fiscal discipline; some strategists positioned for a wider gap between short- and long-term gilt yields and for further pressure on the currency.

LONDON, May 12 - UK borrowing costs climbed close to levels not seen since 2008, the pound slid and equities declined on Tuesday as markets reacted to growing doubts about the continuity of the Keir Starmer government. Starmer was reported to be consulting colleagues about whether he can remain prime minister ahead of a pivotal cabinet meeting, after a string of ministerial aides resigned and nearly 80 members of parliament publicly urged him to step down following a heavy defeat in last week’s local elections.

Markets pushed the benchmark 10-year gilt yield up 11 basis points to 5.11%, leaving it just below the highs reached in March that were driven by concerns over the inflationary impact of the Iran war. The 30-year gilt, which market participants often view as particularly sensitive to fiscal credibility, rose 10 basis points to 5.78%, moving back toward the near-1998 peak it touched last week.

The pound weakened across major currencies, falling about 0.5% to $1.354 and easing roughly a third of a percent to 86.80 pence per euro.

Markets also priced in the prospect of a leadership change as a risk to fiscal discipline and to sterling. Mohit Kumar, an economist at Jefferies, said:

"A managed exit would be our base case scenario. Any replacement would likely be left leaning and be negative for the long end of the curve and the currency."

Kumar added that he was positioned for a widening between short- and long-dated UK borrowing costs and was betting against the pound.

Equities were under pressure, with the FTSE 100 index down nearly 1% in early trading. UK banking stocks were particularly weak: Barclays fell about 4% in early trade, while NatWest and Lloyds were each down more than 3%.

Investors cited the political uncertainty surrounding the prime minister’s future as a driver of selling across gilts, the pound and risk assets. The combination of a higher long end of the gilt curve and a softer currency reflected concern that any change in leadership could lead to a relaxation of the fiscal tightness currently associated with the government.

Market snapshot

  • 10-year gilt yield: up 11 bps to 5.11%
  • 30-year gilt yield: up 10 bps to 5.78%
  • Pound: down about 0.5% to $1.354; down about 0.33% to 86.80 pence per euro
  • FTSE 100: down nearly 1%
  • Selected bank movers: Barclays down ~4%; NatWest and Lloyds down over 3%

Political developments - specifically the consultation over the prime minister’s tenure, the resignations of ministerial aides and the public calls from almost 80 lawmakers for him to go - were central to market moves. The exact outcome of the consultations and the cabinet meeting was not stated in the reporting available to markets on Tuesday.

Traders and strategists positioned for further divergence between short- and long-term borrowing costs and for pressure on the pound while political uncertainty remains elevated.

Risks

  • Uncertainty over the prime minister’s future and potential leadership change, which could affect fiscal policy credibility and put upward pressure on long-dated gilt yields - impacting government borrowing costs and fixed-income markets.
  • Renewed weakness in sterling linked to political developments, which could affect import prices, exporters and currency-sensitive assets.
  • Equity market volatility, especially among UK banks and domestically focused stocks, as investors reassess risk under political instability.

More from Economy

Trump Says He Will Discuss Iran with Xi in China Visit, But Says He Doesn’t Need Beijing’s Help May 12, 2026 U.S. Posts Reduced $215 Billion April Surplus as Refunds and Outlays Rise May 12, 2026 Bundesbank's Nagel Says Iran Conflict Could Force ECB to Raise Rates May 12, 2026 EIA Sees U.S. Electricity Use Climbing to New Highs Through 2027 May 12, 2026 Chicago Fed’s Goolsbee Flags Broadening Inflation, Cites Services as Main Concern May 12, 2026