The UK rates market had to digest a heavy flow of news over the past week. The Bank of England (BoE) kept the base rate unchanged, inflation came in slightly below expectations, and Prime Minister Keir Starmer resigned on Monday to pave the way for a new Labour leadership. According to news reports, Andy Burnham, the former Mayor of Manchester, is now increasingly likely to be the sole contender nominated to replace Starmer and, in the absence of a leadership contest, could be in office by mid-July.
Changes at Number 11 will be decisive
The bond market reaction so far has been relatively modest. Gilt yields across the curve are trading roughly 30 basis points (bp) below the highs seen a month ago: 30-year gilts at 5.45% (vs. ~5.85%, the highest since 1998), 10-year yields at 4.75% (vs. ~5.17%), and 2-year yields at 4.16% (vs. ~4.5%).
This moderate reaction reflects three factors. First, bond yields had already adjusted in anticipation following Andy Burnham’s by-election victory in Makerfield. Second, yields declined in line with global bond markets, driven by a sharp drop in oil prices. Third, both the bond market and the BoE are likely to focus more on changes at Number 11 Downing Street (the chancellor of the exchequer’s residence) than at Number 10.
Muted gilt market reaction to Keir Starmer’s resignation
Sources: Bloomberg, Barclays Private Bank, June 2026. Past performance is not an indication of future performance.
How might the Bank of England respond?
Money markets continue to price in a rate hike as early as October or November. However, expectations have moderated compared with March, when nearly four hikes were priced in by year-end. This adjustment reflects the sensitivity of the front end of the curve to the recent decline in oil prices, the softer inflation print, and expectations that UK inflation may peak at a lower level than feared during the height of the Middle East conflict.
A potential Burnham-led government could, at the margin, influence the path of the policy rate, but such effects remain speculative at this stage. One key upside risk to inflation would be tax increases or changes to the National Living Wage (NLW), which remains a focal point for policymakers. Historically, NLW adjustments have contributed to services inflation, a key metric for the BoE. For now, the central bank expects a moderation in NLW increases, which should ease inflationary pressures, although any policy changes could alter this trajectory.
Money markets have moderated hike expectations
Sources: Bloomberg, Barclays Private Bank, June 2026.
Bank of England likely to hold the base rate
The BoE’s central challenge is balancing still above-target inflation with a cooling labour market. While core inflation (excluding energy and food) at 2.6% year-on-year (y/y) is moving closer to the 2% target, persistently elevated services inflation at 3.7% y/y remains a concern.
Given soft growth, as indicated by the latest Purchasing Managers’ Index (PMI) readings, and with monetary policy already in restrictive territory, the Monetary Policy Committee (MPC) is likely to remain on hold through 2027. At the same time, further labour market softening and lower oil prices could reopen the door to rate cuts later on.
Service inflation remains the focus for the BoE
Sources: Office for National Statistics, Barclays Private Bank, June 2026
Fiscal challenges persist
For the bond market, the primary focus remains on fiscal developments. Andy Burnham has recently moderated his stance, indicating that he would respect existing fiscal rules. Past episodes have shown that ignoring the bond market altogether is not the best idea.
Once confirmed, he is expected to appoint a new chancellor and while changes are expected to be moderate, the risk of subsequent amendments to fiscal plans remains tangible. An incoming chancellor will face familiar challenges: supporting sustainable growth, funding social programmes, limiting tax increases, and maintaining fiscal discipline.
Potential options that have been floated include extending the horizon for meeting fiscal targets from five to ten years, as well as relying more on off-balance-sheet funding mechanisms, such as the National Wealth Fund or regulated asset base models.
UK debt supply remains the focal point
Debt dynamics remain central for bond markets. Government spending stands at approximately 44% of GDP, outpacing revenues, while public debt continues to rise. According to the OECD, UK national debt is projected to increase to 105.4% of GDP by 2027, up from 98.8% in 2023.
Chancellor Rachel Reeves’ fiscal headroom was reported as just under £24 billion, but higher debt servicing costs since the onset of the Iran conflict have once again eroded this buffer.
More broadly, markets will closely monitor government cash requirements, which ultimately drive gilt issuance. These requirements have increased by more than £40 billion over the past three years, at a time when the BoE has been actively reducing its gilt holdings. This combination has added to supply pressures and contributed to higher yields.
UK budget balance and gross debt in % of GDP
Sources: Bloomberg, Barclays Private Bank, June 2026
The road ahead for UK gilt yields
30-year gilt yields are currently trading at levels last seen in 1998, already embedding a meaningful term premium. For example, the difference between the UK 30-year yield and the 5-year yield stands at roughly 115 bp, almost double the difference observed in the US Treasury market. Looking through the recent peak, this is the biggest premium seen in almost nine years. The rise in yields in recent months has been driven primarily by the short end of the curve, reflecting the repricing of policy expectations amid higher energy prices which has caused some flattening of the shape of the yield curve with still higher yields.
Looking ahead, the long end of the curve may come back into focus. Historically, shifts in the fiscal narrative tend to increase market volatility, which we expect over the summer. However, already elevated yield levels and limited additional pressure from the short end should cap further upside in our view.
Against this backdrop, we continue to see value in maintaining a neutral position in the 4–6 year segment of the curve. Periods of heightened volatility are likely to create opportunities to selectively add exposure.
For more insights on the outlook for interest rates, in the UK and the US, listen to this week’s edition of our Markets Weekly podcast.