Bond traders are bracing for the outcome of the 7 May elections, fearing that a widespread defeat for Labour could trigger a political shift to the left, further pressuring government borrowing costs already at their highest since the financial crisis.
Labour's Expected Losses
Polling indicates Labour is set to lose over 1,000 seats to parties including the left-wing Greens and right-wing Reform, as the ruling party grapples with the fallout from the Peter Mandelson scandal. Investors warn that a bruising defeat could force Chancellor Rachel Reeves to loosen self-imposed borrowing limits and increase the risk of a leadership challenge to Prime Minister Keir Starmer from the left.
Former deputy prime minister Angela Rayner and Greater Manchester mayor Andy Burnham have both argued the government should not be beholden to bond markets. Both are viewed as potential challengers for the top job.
Bond Market Vigilance
Iain Buckle, head of UK fixed income at Aegon Asset Management, told the Financial Times: “The bond market will be incredibly vigilant about what kind of political change comes out of [the regional elections]. It wouldn’t take a lot more news to get yields back up to levels that wouldn’t be sustainable over the long term.” Aegon holds a lower-than-benchmark allocation to long-term gilts, while Allspring Global Investments confirmed it has recently flipped to underweight amid ongoing economic and political pressures.
Gilt Yields at Elevated Levels
Gilt yields, which move inversely to prices, have risen over the past two months due to fears that the Iran war will push up UK inflation and speculation over Starmer’s future. The 30-year yield is nearly 5.7%, close to its highest this century, while a 10-year debt sale last month yielded just above 4.9%, the highest since 2008.
Significant gains on either the left or right could make it harder for the UK to control spending and debt, especially as the country already has the highest borrowing costs in the G7.
Green Party Gains Seen as Disastrous
Lloyd Harris, head of fixed income at Premier Milton, said surges by the Green party, which promises huge tax and spending increases, would be “disastrous” for the bond market.
Investors and analysts noted that the most immediate concern is the Labour leadership's position. Both gilts and the pound have suffered sell-offs whenever Starmer or Reeves’ jobs appeared under threat. Traders are also running short-term bets against the pound versus the euro, meaning a better-than-expected election result for Labour could trigger a relief rally in bonds and sterling.
However, others remain cautious, as a swing to the left could deteriorate sterling's financial position.
Potential Leadership Candidates
Bond investors view left-wing candidates like Burnham and Rayner as more likely to preside over higher borrowing than centrists such as ministers Wes Streeting and Yvette Cooper. In March, Rayner sought to reassure investors of her commitment to the party’s fiscal rules, including a promise for debt to fall as a share of GDP by the end of Parliament. Burnham has said people “deliberately misinterpreted” his position on bond markets, but in a Bloomberg TV interview he suggested exempting defence spending increases from fiscal rules.
