LONDON — UK government bond yields rose and the pound weakened as turmoil around Prime Minister Keir Starmer rattled investors and revived speculation about a Labour leadership challenge. The pressure intensified after senior departures in Keir Starmer’s inner circle following a controversy over Peter Mandelson’s appointment as ambassador to the United States, raising fears of a shift in fiscal policy and higher borrowing, Feb. 9, 2026.
The benchmark 10-year gilt yield climbed to a session high of 4.569% — up 5 basis points — after the prime minister’s communications director, Tim Allan, quit, according to Reuters. Higher yields mean higher funding costs for the government because gilt prices fall as yields rise.
Allan’s resignation came a day after Morgan McSweeney, Keir Starmer’s chief of staff, stepped down and said he took “full responsibility” for advising the Mandelson appointment, the Guardian reported. Mandelson’s links to disgraced financier Jeffrey Epstein have dominated UK political debate and sharpened scrutiny of Downing Street’s vetting process.
Keir Starmer crisis adds a political risk premium to gilts
Investors have been quick to price political risk because a contest to replace Keir Starmer could reopen questions about whether Labour would keep to its existing borrowing limits. In an earlier bout of selling, the 10-year yield hit 4.605% and 30-year yields touched 5.406%, while the pound fell 0.7% against the dollar, Reuters reported Feb. 5.
Rabobank strategist Benjamin Picton said McSweeney’s resignation “may buy Starmer some time,” but added that poor polling and backbench unrest were fuelling a sense that the prime minister’s “days are numbered.” Political risk consultancy Eurasia Group put the probability of a leadership challenge and Keir Starmer’s removal this year at 80%, Reuters said.
Market participants are also watching who could follow Keir Starmer if pressure builds. Aberdeen Investments’ Matthew Amis said Angela Rayner would be the favorite if Starmer stepped aside, adding that she is seen as more left-leaning and that “the market would expect looser fiscal policy and a greater supply of gilts.” Bloomberg said longer-dated bonds remained under pressure as investors braced for renewed instability and the pound fell against the euro, according to Bloomberg.
How Keir Starmer got here: markets have seen this movie before
UK investors still carry scars from the 2022 gilt turmoil triggered by then-Prime Minister Liz Truss’ unfunded “mini-budget,” which forced policy reversals and a scramble to restore credibility, Reuters reported in October 2022. That episode turned gilt moves into a real-time verdict on political stability.
Since then, Labour under Keir Starmer has repeatedly leaned into fiscal caution to broaden its appeal. Before taking power, Starmer’s party scrapped a plan to eventually spend 28 billion pounds a year on green investment, citing high borrowing costs, Reuters reported in February 2024. After Labour’s 2024 election victory, Chancellor Rachel Reeves promised “guardrails” on extra borrowing to reassure investors, Reuters reported in October 2024.
That push for stability echoed Keir Starmer’s message when he became Labour leader in 2020, promising to end years of internal infighting, Reuters reported at the time. Investors now want proof that the government can contain the political fallout and keep its economic program intact.
What investors watch next
Markets will take their next cues from Tuesday’s sale of a five-year gilt and Thursday’s economic growth data, along with any signs that Labour lawmakers are moving from criticism to an organized challenge. Recent auctions have shown strong demand, but traders say confidence is fragile: the longer the Keir Starmer crisis drags on, the more investors may demand compensation to hold UK debt.
