Introduction: Bond market steadies after Tuesday volatility

Good morning, and welcome to our continuous updates on business, financial markets, and the global economy.

Britain's bond market shows signs of recovery today after political unrest yesterday spiked government borrowing costs.

Long-term UK bond yields reached 28-year peaks on Tuesday amid concerns over potential Labour leadership shifts, sparking investor unease and cautions of ongoing market instability.

However, this morning Keir Starmer holds firm, resisting calls for a resignation timeline, as health secretary Wes Streeting has not mounted a bid so far.

Investors have cautioned that a leftward Labour pivot could unsettle bonds due to expectations of increased borrowing and expenditure.

Yet, Reform's potential election victory and Nigel Farage entering No. 10 also factor into rising yields, boosted by their recent local election advances.

Ipek Ozkardeskaya, senior analyst at Swissquote, notes today:

Britain faces its political upheavals post Farage's election success. Markets view Farage as signaling laxer fiscal measures, elevated spending, and bigger deficits, amid existing worries over UK debt and inflation.
This mix prompts investors to seek greater returns on UK debt, lifting the 10-year gilt yield above 5% - the top since 1998. Elevated costs curb government borrowing and hinder growth.

Yesterday's bond swings stemmed from Labour's internal crisis, with Streeting backers urging quick action and Andy Burnham allies positioning him as the fix, assuming parliamentary return.

Earlier, Bill Blain of Wind Shift Capital questioned Reform's readiness for markets:

Who in Reform will manage bond markets and spending efficiency? How to tackle housing - not just 1.5m executive homes, but affordable options for youth stability? Who addresses welfare's £39bn housing benefits (twice defence)? Who handles NHS, defence, and potholes - England's top threat since the Armada?
Reform aims to govern. Can they convince bonds over three years?

The government presents its agenda in today's King's Speech, potentially easing Starmer's woes from resignations and exit demands.

Today's schedule

9am BST: IEA monthly oil report
10am BST: Eurozone Q1 2026 GDP final figures
1.30pm BST: US April producer prices
3pm BST: BoE's Catherine L Mann speech on UK exposures

Key events

49m agoGoldman Sachs: BoE unlikely to hike rates on new Labour PM's spending
1h agoUK bond yields drop as Streeting bid fizzles
2h agoIntroduction: Bond market steadies after Tuesday volatility

UK stocks rise at open, City sentiment improves.

FTSE 100 gains 66 points or 0.65% to 10,331. Miners lead on copper price uptick.

FTSE 250 up 0.4%.

Two-year fixed mortgage rates edge lower despite prior yield spike.

Moneyfacts data:

Average 2-year fixed: 5.74%, down from 5.75%
Average 5-year fixed: 5.67%, steady

UK gilts rebound as Starmer stays put, per XTB's Kathleen Brooks:

Bond focus today: 10-year yield dips 4bps sans clear PM rival. King's Speech proceeds amid reports Charles queried No. 10 post-turmoil.
Coup timing near parliament opening tough; Starmer secure but uneasy. Gilts recover tentatively, pound and stocks steady.

Still, 10-year over 5%, straining fiscal space from Reeves' budget.

Goldman Sachs: £12bn budget hit from yields, growth slowdown.

James Moberly's team:

Higher yields and slower growth cut fiscal headroom by £12bn (0.3% GDP).

Largely Iran conflict energy shock, not yesterday's spike now reversing.

Goldman: BoE won't hike rates on new Labour spending surge

New Labour head boosting spend unlikely to spur BoE rate rise, says Goldman.

James Moberly: No instant MPC impact from politics.

Higher risk no direct BoE effect. Possible future tightening if fiscal loosens inflation, but history shows no rate hikes for political risks or currency aid.

Burnham could spend more sans quick hikes, eyeing defence outside rules.

Yet policies curbed by spending pressures, high taxes. Bond selloff mostly rate repricing from Iran war.

BoE holds rates this year, possible summer hike on energy.

Bond yields retreat post-Streeting non-challenge

Government bonds firm up, costs fall early.

Relief Starmer endures sans Streeting move.

30-year yield down 4.4bps to 5.72% from 28-year high 5.81%. 10-year -4bps to 5.06%.

Modest shifts signal market calm return.

Streeting to confer with Starmer candidly, insiders say speculation ebbing.

Lloyd Harris of Premier Miton:

Labour shaped by dynamics, unions favoring spending. Markets price probabilities, not ideals. Burnham's bond market quip highlights fiscal risk aversion.
Markets demand conviction on discipline; vigilantes reprice risks.

UK as global warning? TS Lombard on 'macro supercycle': UK hit downsides first, no upsides soon, volatility ahead, recession risk high.

Ex-hedger Rich McDonald: Prolonged Starmer replacement hurts markets.

Burnham left-shift, spending? Bonds warn via yields near 6%, hiking debt costs.

Long gilts at 30-year highs scream: Order your house, Labour.