UK government bonds and the pound could come under severe pressure if Wes Streeting were to resign from the cabinet today in order to launch a leadership challenge against the Prime Minister.
Speculation is growing that Streeting could step down as Health Secretary and launch a leadership challenge against Keir Starmer, potentially triggering a drawn-out power struggle within the government at a time when markets are already putting pressure on the UK.
Markets fear political vacuum in Westminster
If Streeting were to resign and trigger a leadership challenge, UK gilts and the pound could quickly slide into crisis territory, as I said to Daily Mail, Daily Mirror, The Guardian, London Loves Business, Investor Ideas, and Business Money, amongst others.
Markets hate uncertainty, but they hate a political vacuum even more. A cabinet resignation followed by a leadership contest would suggest the government is losing internal control at a time when investors are questioning the UK’s fiscal direction.
UK financial markets are already showing signs of strain. The benchmark 10-year gilt yield rose to 5.13% this week, its highest level since 2008, while 30-year yields climbed above 5.8%, a peak not seen since 1998.
Meanwhile, sterling weakened toward $1.35 against the dollar as investors reduced exposure to UK assets.
Rising gilt yields translate into higher government borrowing costs, increased mortgage rates, and more expensive funding conditions across the wider economy.
If gilt markets were to sell off further, the impact would ripple through the wider economy. Government borrowing costs would rise, households would face higher rates, businesses could delay investment decisions, and overall confidence would weaken.
Investors remain haunted by the 2022 gilt crisis
A resignation by Streeting would likely be seen by markets as the beginning of broader political instability. Investors would quickly start questioning who might follow, how extensive any cabinet reshuffle could be, and whether the current government structure could remain intact.
If one senior figure steps aside, it could trigger a chain reaction of further departures, with former Deputy Prime Minister Angela Rayner expected to play a key role in the subsequent shift in internal party dynamics.
Indeed, Rayner has reportedly settled an unpaid stamp duty bill, clearing the way for a potential bid in any future Labour leadership contest. She confirmed she has paid the £40,000 tax bill related to a flat near Brighton, and said she has not been issued a penalty by HMRC.
If Streeting were to resign, political pressure would intensify sharply, forcing other figures to align themselves on competing sides. In that scenario, Rayner’s position would become central, while investors would begin pricing in the risk of a shift toward more left-leaning policies on tax, spending, and labour.
That is where concerns typically deepen. Markets can accommodate different ideological approaches provided they are consistent and well-structured, but they react negatively to policy frameworks that suggest significantly higher borrowing without a clear or credible path to economic growth.
Investors still recall the 2022 gilt market turmoil, when concerns over fiscal credibility sparked a sharp bond selloff that ultimately required emergency intervention from the Bank of England.
The UK would not need a repeat of the 2022 crisis to face economic strain. Even a perception that fiscal discipline is weakening could be enough to unsettle markets. Once such doubts take hold, risk premiums can rise rapidly.
This week’s movements in the gilt market suggest confidence is already fragile, and a leadership contest could significantly intensify the reaction.
Sterling and long-dated gilts under scrutiny
Britain is also facing persistent inflation pressures, high global bond yields, and geopolitical strains in energy markets, all of which leave limited room for domestic political missteps.
The timing is particularly challenging, with global borrowing costs elevated, inflation still a concern, and investors increasingly selective about where they allocate capital. In such conditions, markets tend to penalise countries perceived as politically or economically unstable more quickly and severely.
Markets would closely monitor three key indicators if Streeting were to resign: the 10-year gilt yield, liquidity in long-dated gilts, and sterling’s performance against the US dollar.
A decisive move above recent highs in the 10-year yield, renewed heavy selling in long-dated bonds, and a sharp break lower in sterling would signal a clear and negative market reaction.
However, a clear political direction could still help prevent escalation.
The key requirement is strong political authority and credible fiscal policy. Investors need clarity on leadership, the economic framework, and whether it is stable and sustainable.
If we see resignations, internal rebellion, and competing policy signals, the UK risks turning a political dispute into a significant market event, one that would likely be immediate, costly, and potentially avoidable.
To read my previous blog post, click here.