British political storm ignites sell-off: pound falls to two-week low, long-term British bond risk premium soars.

Notice, the new round of political turmoil in the UK spilled over to the country's financial markets on Thursday, dealing a severe blow to the pound and long-term bonds. This led to the spread between the yields on 2-year and 10-year UK bonds widening to the highest level since 2018, while the pound performed the worst among similar currencies. The 30-year yield also hit its highest level since November. At the time of the market volatility, concerns about Prime Minister Keir Starmer's ability to hold power increased, driving up the political risk premium demanded by investors. Despite knowing of Peter Mandelson's association with the late disgraced financier Jeffrey Epstein, Starmer still decided to appoint him as the ambassador to the US, a decision that has placed him under increasing pressure. Evelyn Gomez-Richti, strategist at Mizuho International, said, "The Mandelson controversy is quickly evolving into a threat to Starmer and the long end of UK bonds, which are highly sensitive to any negative political news." UK yield curve reaches steepest level since 2018 The pound's exchange rate fell by 0.7% to $1.3557 at one point, its lowest level in nearly two weeks. The currency's options performance also indicated the most bearish sentiment in two months. The yield on the 10-year UK bond rose by 4 basis points to 4.59%, widening the spread with the stable 2-year bond yield to 86 basis points. The 30-year UK bond yield also increased by 5 basis points to 5.38%. Long-term debt is more sensitive to political and fiscal risks, while short-term government bonds are mainly driven by monetary policy. It is expected that the Bank of England will maintain interest rates unchanged later on Thursday. Jamie Hill, strategist at Citigroup, pointed out, "While the bond market keeps a close eye on political developments, the short-end market will focus on today's Bank of England meeting. The Monetary Policy Committee (MPC) has little reason to act hastily, especially considering the recent unexpectedly positive UK data and pressure on UK bonds. The increased political uncertainty yesterday further exacerbated the devaluation of the bond market." Downside risks for the pound increase Although long-term UK bond yields are still far below last year's peak, rising borrowing costs are another tricky issue facing Starmer, given the dismal performance of the Labour Party in polls and his record-low support. It is expected that the party will perform poorly in the local elections in May. Skyler Montgomery-Conning, macro strategist, said, "This is a negative signal for the currency, not only because political turmoil is unsettling, but also because any changes in leadership could be interpreted as a precursor to fiscal expansion. Given the long-term challenges the UK faces in debt financing, the market will undoubtedly react negatively to such events." Over the past year, the market has been exceptionally sensitive to speculation about the future of Prime Minister or Chancellor Rishi Sunak, assuming that any successor may be less committed to UK fiscal rules. Two weeks ago, UK bonds faced selling pressure when Greater Manchester Mayor Andy Burnham appeared to have a path back to Parliament. Burnham, a left-wing rival who has criticized Britain's excessive market compliance, is seen as a potential challenger for the prime minister position. Chris Turner, director of foreign exchange strategy at ING, said, "The prospect of changes in both the prime minister and the chancellor continues to be one of the core threats facing the pound this year. By-elections later this month and local elections in May mean that the coming months in the UK political scene will be extremely noisy."