Downing Street Resignations Trigger Bond Market Jitters
•February 9, 2026
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Why It Matters
The volatility underscores how political turbulence can quickly inflate borrowing costs and strain the UK’s fiscal outlook, affecting both sovereign debt performance and the pound’s exchange rate.
Key Takeaways
- •10-year gilt yield rose to 4.62% after resignations.
- •Resignations sparked political risk premium on UK long-term debt.
- •Yield curve steepened to widest since 2018.
- •Potential left‑leaning successor could push borrowing costs above 5%.
- •Markets steadied after cabinet allies reaffirmed support for Starmer.
Pulse Analysis
The sudden wave of senior Downing Street resignations has injected fresh uncertainty into the United Kingdom’s sovereign debt market. Within hours of communications chief Tim Allan’s departure and chief of staff Morgan McSweeney’s exit, the 10‑year gilt yield spiked to 4.62%, a ten‑basis‑point jump that pushed the benchmark to a three‑month high. Traders interpreted the personnel turmoil as a proxy for possible leadership change, prompting a rapid reassessment of the political risk premium embedded in long‑dated UK bonds. The episode underscores how quickly market sentiment can pivot on domestic political cues.
The yield curve’s steepening to its widest spread since 2018 further signaled investor anxiety about the government’s fiscal trajectory. Analysts at Capital Economics warn that a left‑leaning successor to Prime Minister Keir Starmer could relax fiscal discipline, raising borrowing costs and potentially driving 10‑year yields above the 5% threshold. Such a shift would not only elevate the cost of servicing public debt but also pressure the pound, which could slip toward $1.20 against the dollar. The market’s focus now lies on whether the current cabinet can restore confidence or if policy drift looms.
For bond investors, the episode highlights the importance of monitoring political developments alongside macroeconomic data. The added risk premium has already made UK gilts the poorest performer among European sovereigns, prompting portfolio reallocations toward safer assets. While the market steadied after cabinet allies publicly backed Starmer, any future leadership turnover could reignite sell‑offs, prompting tighter fiscal tightening later. Stakeholders should therefore factor political stability into duration management and consider hedging strategies to mitigate potential currency and rate shocks.
Downing Street resignations trigger bond market jitters
Nervousness rippled through UK bond markets on Monday after a series of Downing Street resignations concentrated minds on the uncertain future of prime minister Sir Keir Starmer.
The 10-year gilt yield – a key benchmark for the government – jumped as much as 10 basis points to 4.62 per cent in the early afternoon following news that Scottish Labour leader Anas Sarwar would give a speech calling for Starmer to quit.
That came shortly after the resignation of Downing Street communications chief Tim Allan, the second such departure of a close Starmer aide in 24 hours following the exit of chief of staff Morgan McSweeney on Sunday.
The intra-day bond moves pushed 10-year yields above last week’s peak of 4.6 per cent to hit a three-month high. But calm later pervaded markets after key cabinet allies rallied around Starmer and shook off any prospect of his imminent departure, causing yields to end the day only slightly higher at the close of the trading session.
Kathleen Brooks, research director at XTB, said: “This is likely to be an unsettling time for UK bond investors, as any successor could push UK economic policy further to the left, which may trigger a selloff in UK debt. In the past month, a political risk premium has been added to UK long-end debt, and the 10-year Gilt is the worst performer in Europe and is underperforming the US.”
Yield curve in focus
Over the past week, nerves have engulfed the bond market in a sign investors were betting against the stability of the Starmer government.
The gulf in price between the UK’s short- and long-term debt – known as the yield curve – reached its highest since 2018 last Thursday, in a sign investors were losing faith in the long-term credibility of the UK economy even as the interest rate outlook improved.
Ruth Gregory, deputy chief UK economist at Capital Economics, said any replacement to a Starmer administration could “pivot to slightly looser fiscal policy and decide to live with higher borrowing costs.
“The issue is that the longer this lasts, the greater the risk of a bigger sell-off in the gilt market eventually, which could force the government into a more abrupt fiscal tightening.”
If a more left-leaning top team were to replace Starmer, a weakening of the fiscal guardrails and promises of big increases in both public spending and borrowing could trigger a bigger initial spike in 10-year yields to north of 5 per cent, Gregory said, and a bigger initial fall in the pound to as low as $1.20.
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