Starmer "in jeopardy," pound and UK bonds crash again—does the "British Empire" still have hope?

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Another earthquake in British politics, as the market is the first to vote with its feet.

Between May 14 and 15, as Prime Minister Starmer's governing crisis suddenly escalated, both the pound and British government bonds came under pressure. Health Secretary Wes Streeting publicly resigned, and Manchester Mayor Andy Burnham announced he would seek to return to Parliament, paving the way to challenge for the prime ministership. The pound fell almost 1% in a single day to $1.3403, its lowest since April 13, and posted its biggest weekly drop since January 2025. Meanwhile, the yield on 30-year UK gilts rose above 5.8% on May 12, the highest level in nearly 30 years.

The market's logic is straightforward: the probability of Starmer stepping down is rising, and his potential successors generally favor looser fiscal policy, which means the UK government may borrow more and issue more debt. Bond investors are highly alert to this.

According to Bloomberg Economics, just in the few short days from May 8 (when local election results were announced) to May 12, the rise in government bond yields alone would suffice to add an additional £2 billion (about $2.7 billion) in interest expense to debt by the end of this decade.

Resignation Letter Causes Uproar

Wes Streeting’s resignation letter was blunt and unreserved.

"As you know from our conversation earlier this week, because I have lost confidence in your leadership, I believe it would be dishonest and lacking in principle for me to stay on," he wrote in the letter.

He further pointed out that last week‘s local election result was "unprecedented" and the government’s "unpopularity" was the "main common factor" across the UK — and he directly criticized Starmer: "We need vision, and instead there is a vacuum; we need direction, and instead there is drift."

Streeting is widely seen as having leadership ambitions within Labour, but he did not officially announce his candidacy in the resignation letter.

Meanwhile, Manchester Mayor Andy Burnham’s actions were more concrete. Labour MP Josh Simons announced his resignation from his Manchester seat to make room for Burnham to run. Simons wrote in his statement: "I'm stepping aside so that Andy Burnham can return to his hometown, re-enter Parliament, and, if elected, drive the urgent change this country needs."

Burnham immediately stated he would seek approval from the Labour Party’s National Executive Committee to stand for the seat.

Why is the Bond Market So Sensitive?

To understand why the market is so sensitive to UK politics, one must first understand the core role of gilts in public finance.

Simply put: when the government spends more than it collects in taxes, it must borrow from bond investors. The cost of borrowing is the interest it pays, i.e., the yield. The higher the yield, the greater the government’s debt burden, and the less is left for public services.

In the last fiscal year alone, the UK government spent around £100 billion just on debt interest, according to the Office for Budget Responsibility, an amount equivalent to the government’s annual education expenditure.

Currently, the yield on 30-year UK gilts is about 5.7% to 5.8%, far higher than for bonds of the same maturity in Europe and other developed countries. There are multiple factors behind this: UK inflation is more stubborn than elsewhere, so the Bank of England has kept rates relatively high; the Middle East wars have driven up energy prices, and the UK is highly dependent on imported energy and especially vulnerable.

In addition, the UK gilt market itself is structurally fragile. Compared to the US Treasury market, the UK gilt market is much smaller in scale, so even small trades can spark relatively large price swings. Pension funds, which used to be stable holders, have been shifting towards stocks and other risk assets in recent years, while the Bank of England has moved from buying to selling large amounts of gilts. The market share of hedge funds and foreign investors is rising; when these investors get nervous, they are often the first to sell.

"The gilt market now has more yield-sensitive buyers," said RBC Wealth Management’s Head of Fixed Income, Rufaro Chiriseri. "There will continue to be more noise in the market."

Fiscal Rules are the Core Dispute

The core policy pledge under Starmer and Chancellor Rachel Reeves has been a self-imposed fiscal rule: everyday spending must be matched by tax income, and the government can only borrow for investment purposes. The aim is to signal bond investors that the government will not borrow excessively.

But this rule has led to ongoing friction within the Labour Party.

Andy Burnham has publicly criticized the government’s economic approach, saying the UK is "held hostage by the bond market". He has also proposed that the government could fund defence spending with more borrowing, circumventing the fiscal rules.

Another possible contender, Angela Rayner, has tried to reassure investors Labour would maintain fiscal discipline but had previously led the cabinet in opposing Reeves’s plan to cut welfare spending.

Even Streeting, considered relatively moderate, has publicly stated that he is "very uncomfortable" with the UK’s level of taxation.

Bloomberg Economics analysts Dan Hanson and Antonio Barroso wrote: "A change in leadership could intensify this trend, squeeze fiscal space, and become another drag on the UK economy, which is already struggling with an energy shock."

Nomura strategist Dominic Bunning said he would closely watch for any statement Burnham makes on fiscal policy in the coming days. "If selling persists, even if it’s gradual, people will question him about why his announcement triggered the selloff, and whether he wants to reconsider his argument about being 'held hostage by the bond market'," Bunning said.

The Shadow of the "Truss Moment" Lingers

The sensitivity of the gilt market to political risk is inseparable from the crisis of 2022.

That year, then-Prime Minister Liz Truss launched the so-called "mini-budget," which included £45 billion of unfunded tax cuts, directly causing a collapse in the gilt market, the pound slumping to record lows, and the Bank of England having to step in and buy gilts in an emergency. Truss was forced to resign after just 49 days in office.

The lessons of that crisis still cast a long shadow over British politics and markets. According to Bloomberg, pension funds have since been required to hold larger cash buffers, and the Bank of England has introduced new liquidity tools to cope with future market turmoil.

But market vigilance has not faded. Paul Markham, Investment Director at GAM Investments, told Bloomberg Radio: "People really do remember 1976, when the UK government was basically bankrupt. I don’t think we should rule anything out in any way."

In 1976, the UK had to seek a $3.9 billion emergency loan from the International Monetary Fund.

Ten Years, Seven Prime Ministers: The Plight of Governance

The deep-seated issues in British politics go far beyond Starmer’s current predicament.

According to Bloomberg, the UK has already had four prime ministers in less than four years. If Starmer steps down, the UK will have its seventh prime minister in about a decade. Theresa May and Boris Johnson each served roughly three years, Truss lasted just 49 days, and Rishi Sunak has served for 20 months.

Robert Shrimsley, a columnist for the Financial Times, wrote on May 14 that the situation does not mean the UK is "ungovernable," but rather "badly governed." He pointed out that for the past ten years, British politics has been marked by short-sightedness, "slogans instead of detail," and all parties offering "fictional platforms" in elections to avoid making real policy choices.

Starmer himself is no exception. Shrimsley wrote that Starmer neither drafted detailed policy plans before coming to power nor prepared his party for tough choices. When welfare reform was put on the table, Labour MPs immediately rebelled.

Nick Rees, head of macro research at Monex Europe, said: "The market is now seriously considering the prospect of Starmer’s term ending, as Burnham’s path back to Parliament is clear."

Jayati Bharadwaj, FX strategy chief at TD Securities, added: "We expect persistent political tension in the UK to continue putting pressure on the pound against both the dollar and euro."

The turmoil in British politics is being transmitted to the market in ever more direct ways. For investors, the cost of this leadership transition is already being priced in.

Risk Disclosure and DisclaimerThe market carries risks and investments should be made cautiously. This article does not constitute individual investment advice, nor does it take into account any user’s special investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment based on it is at your own risk. ```