UK Gilt Yields Surge Amid Labour Leadership Uncertainty: GBP Exposures Cut by Institutions

Political turmoil within the UK Labour Party is driving a sell-off in government bonds and prompting institutional investors to cut exposure to sterling assets. Ten-year gilt yields climbed to 4.59% on reports that Scottish Labour leader Anas Sarwar may demand Prime Minister Sir Keir Starmer step down, before easing to 4.53% later in the session. Banks including Mizuho and Aberdeen, as well as asset managers at Premier Miton and Standard Life, have reduced gilt holdings and broader UK equity exposure, citing risks of higher public spending, expanded welfare, and a more left-leaning fiscal stance under a successor government. The pound fell to about €1.148 and traded near $1.37 as investors priced in sterling weakness and higher borrowing costs. Economists warn a leadership change could trigger a “mini-Budget”-style fiscal tightening, pushing gilt yields higher by as much as 0.5 percentage point and appreciating the risk of recession. Markets remain focused on the leadership race, with Angela Rayner and Andy Burnham as top contenders, and prediction markets giving Starmer a 77% chance of losing his job by year-end.