The "Sword of Damocles" hanging over UK bond traders—how much longer can Starmer last?

```

UK Prime Minister Starmer is facing the most serious political crisis since taking office, and the trigger for this crisis is none other than the late American financier Jeffrey Epstein, whom he has never met.

Bloomberg columnist John Authers pointed out in his latest article that although Starmer is not directly connected to the Epstein scandal, the turmoil has posed an ongoing threat to the UK bond market.

Betting market forecasts show that investors believe Starmer will step down by the end of June this year. After Scottish Labour leader Anas Sarwar publicly called for the Prime Minister's resignation last week, UK government bond yields rose significantly. Although current market reactions have not reached the extreme levels of the 2022 "Truss moment," political uncertainty is accumulating.

Jordan Rochester of Mizuho Securities said that for many market participants, it is just a matter of time. Until the "who will succeed" issue is resolved, the sword of Damocles will continue to hang over UK bond traders. As the Epstein scandal continues to escalate, other countries’ politicians may also feel similar pressures.

Labour Party internal elections typically take about two months, and there is currently no clear front-runner. The most likely candidates are ideologically more left-leaning than Starmer and more likely to cause fiscal issues, further intensifying market concerns.

The Market Dimension of the Political Crisis

Starmer’s predicament stems from the 2024 appointment of Labour Party veteran Peter Mandelson as ambassador to the U.S., in hopes of improving relations with the Trump administration. However, after Mandelson’s correspondence with Epstein was exposed, he was dismissed. Emails disclosed last week showed that he had revealed market-sensitive policy decisions to Epstein while serving as Deputy Prime Minister. Over the past two days, Starmer’s chief of staff and communications director have been forced to resign, and the chief civil servant may follow suit.

Although Starmer holds an unshakable majority in the House of Commons, allowing his term to continue until summer 2029, betting market Polymarket data shows investors believe the probability of his departure before the end of June has risen significantly. The latest Ipsos poll shows Labour’s approval rating at only 19%, and Starmer’s support once fell below Truss’s level.

Tina Fordham of Fordham Global Foresight posits two interpretations: either this is a uniquely British political culture problem—politicians are relatively easily bought, and political culture is extremely self-righteous; or the UK government is merely the first victim of the Epstein scandal's broader blow to Western political and business establishments.

Key Differences with the Truss Moment

The current market reaction is essentially different from the 2022 Truss moment. Back then, a budget featuring unfunded tax cuts led to surging bond yields and a simultaneous plunge in the pound. In contrast, although UK bonds and the pound have fluctuated over the past 12 months, they are far from reaching those extreme levels.

After the market closed on Monday, Starmer gave a closed-door speech to Labour MPs, after which most MPs told the media he performed well. This suggests he is unlikely to be forced out in the next few days. The most likely successors do not have motivation to accelerate this process: former Deputy Prime Minister Angela Rayner resigned due to a tax fraud allegation, which remains unresolved; former Cabinet Minister Andy Burnham is currently Mayor of Greater Manchester and has no parliamentary seat. Both tend to prefer delaying the timetable.

However, Rochester notes that the issue will not disappear, and Labour may suffer significant losses in the May local elections. Until the succession issue is finally resolved, such uncertainties will continue to trouble the UK bond market. More importantly, Starmer has suffered such serious damage because of his extreme vulnerability—his weak support base means any scandal could be the final straw.

Ongoing Risks Facing the Market

John Authers emphasizes in his commentary that while there is no sign yet of a repeat of the Truss moment, the possibility remains. Labour’s internal election will take about two months, and the most likely candidates are ideologically more left-leaning and may pursue policies that worry fiscal conservatives. This means UK bond traders will have to deal with policy direction uncertainty for quite some time.

For investors, the key issue is not just when Starmer will resign, but who will succeed him and what fiscal policies the new government will adopt. If the successor pursues a more radical spending plan without clear funding sources, the market could face volatility similar to 2022.

Currently, the UK bond market remains relatively stable, but this calm may be temporary. With the May local elections approaching and the Epstein scandal potentially continuing to ferment, political uncertainty will keep impacting markets. For UK bond traders, when the sword of Damocles will fall, and how hard it will hit, remain unresolved questions.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their own situation. Invest accordingly, at your own risk. ```