The bond markets may be the only thing to keep Starmer alive.
Sir Keir Starmer has a very unlikely ally at the moment: the bond markets.
After the prime minister reportedly told his cabinet he would not resign, the long-term cost of government borrowing has remained stubbornly high, with the 30-year gilt yield hovering near 5.8 per cent – close to levels not seen in almost three decades. At the same time, traders are increasingly betting that the Bank of England may eventually be forced to push interest rates back up from 3.75 per cent towards 4.5 per cent in order to keep inflation and borrowing pressures under control.
Ordinarily, none of this would be good news for a sitting prime minister. Higher borrowing costs mean tighter public finances, more expensive mortgages and even less room for governments to attempt to spend their way out of trouble (not that this strategy has ever really delivered meaningful long-term growth anyway). But politically, the markets may actually be key in helping Starmer survive.
Labour spent years relentlessly attacking the Conservatives over financial instability and rising borrowing costs, particularly during the Liz Truss premiership. The Truss mini-budget became Labour’s defining economic attack line: proof, they argued, that governments which ignored market confidence would be punished swiftly and brutally. Since entering office, Starmer and his chancellor Rachel Reeves have therefore gone out of their way to cultivate an image of fiscal caution and managerial competence, repeatedly emphasising stability, fiscal rules and venerating the Office for Budget Responsibility above almost everything else.
That matters because, despite growing frustration with Labour’s tax rises, spending pressures and sluggish economic performance, investors still broadly know what they are getting with Starmer. He may not be especially dynamic, but he is predictable and deeply conscious of the reaction of financial markets.
And while this is not even remotely an endorsement of what he has done as prime minister, it, however, may ultimately be what saves him.
While Starmer is increasingly unpopular with voters and now his own MPs, some of the alternatives being discussed inside Labour are far more likely to unsettle markets. Andy Burnham, frequently floated as a potential successor, represents a very different instinct within the Labour movement. Burnham has often spoken in far more openly interventionist terms and has previously decried Britain as being ‘in hock to the bond markets’, with allies of Burnham recently coming out to demand that the markets must ‘fall in line’ with his policies if he became prime minister.
That kind of rhetoric may energise Labour activists frustrated by the so-called fiscal caution of Reeves, but it is exactly the sort of thing markets tend to dislike. Bond investors are not interested in ideological arguments about public spending or state activism. They care about whether governments appear capable of controlling borrowing, inflation and deficits. And Britain already finds itself in a fragile position, with debt interest costs consuming vast amounts of taxpayers’ money and the tax burden heading towards its highest level since the second world war.
And to make matters worse, investors are now warning that Britain risks a Truss-style bond market meltdown if this political instability continues, which would only be intensified if a new prime minister, such as Burnham, were to come to power and pursue a harder, less cautious agenda. Meaning that inflation and gilt yields would spike, and confidence would plummet even more than it already has.
So while Starmer may look politically weak, exhausted and now under siege by his own parliamentary party, he still offers one thing the markets value: predictability, even if that predictability is still just managed decline. Strangely, fear of what might replace him may now be one of his strongest arguments for his survival as prime minister and may be his best argument if he wishes to win back the support of his party.
