'Carnage' as Labour civil war causes chaos for UK economy - 'worst since 1998'

Borrowing costs surged towards levels not seen since the late 1990s on Tuesday as deepening Labour infighting rattled financial markets. The turmoil at Westminster helped drive a fresh spike in gilt yields as investors dumped UK government debt, pushing long-term interest rates sharply higher.

The cost of borrowing for decades ahead consequently climbed back towards multi-decade highs as traders reacted to political instability and renewed global uncertainty linked to the escalating conflict involving Iran. This worrying situation prompted a reaction from the media. Times political editor Steve Swinford warned of “carnage” in the bond markets as trading opened, with UK borrowing costs briefly hitting their highest levels since 1998.

Posting on X, Mr Swinford pointed out that yields were now around 5.8%, adding that “the combination of the turmoil gripping the Labour Party and the ongoing uncertainty over Iran war is pushing up borrowing costs”.

His reporting framed the market reaction as directly tied to the leadership crisis engulfing Labour, with investors demanding a higher risk premium to hold UK debt amid growing political uncertainty.

He said: “The argument from Starmer and his allies is that the leadership turmoil has very real consequences for working people and the cost of living crisis.”

He highlighted how Downing Street is attempting to turn the market shock into a warning to rebellious MPs.

But he added that many backbenchers were pressing ahead regardless.

Mr Swinford wrote that “Labour MPs knew this before they went over the top,” noting that “nearly a third of backbenchers have weighed up the consequences and decided it is still preferable given the risk of electoral oblivion”.

The financial strain was echoed in official market data from the PA news agency, which showed the yield on 30-year UK government bonds jumping by as much as 11 basis points to around 5.785% in early trading.

That put long-term borrowing costs within touching distance of the 28-year highs reached last week. Shorter-term debt was also hit. The yield on 10-year gilts climbed back above the psychologically significant 5% level, rising roughly 10 basis points to 5.101% before easing slightly from intraday peaks.

Because bond yields move inversely to prices, the jump reflected investors selling UK debt unless compensated with higher returns – a sign of growing perceived risk around the UK’s fiscal and political outlook.

Market analysts said the sell-off reflected a mix of domestic instability and external pressures. Chief investment strategist at Wealth Club, Susannah Streeter, said sentiment in markets had turned sharply negative as political tensions collided with global risks.

MS Streeter said: “A glass-half-empty attitude is swirling this morning for the FTSE 100, as concerns about the tense situation in Iran collide with worries about political upheaval in the UK.”

She added that Sir Keir Starmer’s position appeared increasingly fragile, warning that this was feeding directly into gilt market volatility.

Ms Streeter said: “Ten-year gilt yields have risen higher again, reaching above 5.11 %, the highest level since July 2008,” adding that the political crisis had brought “instability back at the heart of British politics”.

Ms Streeter added that investors were now demanding higher returns to compensate for perceived risk, with falling bond prices reflecting a loss of confidence.

However, she also pointed to inflation concerns and energy market volatility linked to the Iran conflict as additional drivers of higher borrowing costs.

The impact of rising yields is expected to filter through the wider economy, with mortgage holders and public finances particularly exposed. Vice-president of personal finance at PensionBee, Maike Currie, warned that the consequences could be felt quickly by households.

Ms Currie said: “Political instability matters because uncertainty can quickly filter through to pensions, mortgages and household finances.”

She pointed to the 2022 mini-Budget as a warning of how quickly gilt-market turbulence can spill over into everyday costs.

Currie said: “Higher gilt yields feed directly into mortgage pricing and borrowing costs. For the estimated 1.8 million households due to remortgage this year, renewed volatility risks keeping mortgage rates higher for longer.”

While she noted that higher yields could improve annuity incomes for retirees, she warned that the broader impact would be tighter financial conditions for families and government alike.

With Labour MPs openly divided and markets increasingly jittery, investors appear to be pricing in a sustained period of political instability – and the cost of that uncertainty is now showing up directly in Britain’s borrowing bill.