UK 30-year gilt yields rose to 5.63%, up 5 basis points, while sterling fell 0.14% against the dollar to $1.3608. The moves followed a string of election defeats for Keir Starmer's government last week, with Labour losing more than 1,000 council seats in England and finishing second in Scotland and third in Wales. Labour's national vote share fell to 17%.

The drop in gilts and sterling reflects investor concern that a prolonged leadership battle could complicate the UK's fiscal position. Borrowing costs are already elevated, and oil prices are adding to inflation pressure. More than 40 Labour MPs have publicly called for Starmer to step aside. Angela Rayner and Andy Burnham are both being discussed as potential successors, though neither has formally declared.

Gilt markets have been tracking UK political news closely as investors consider whether a leadership change might mean looser fiscal policy and softer spending constraints. "The writing appears to be on the wall for Keir Starmer's premiership," said Lee Hardman, senior currency analyst at MUFG. Jefferies analyst Mohit Kumar said the bank's base case was a "managed exit" in which Starmer would set a timeline for his successor. Kallum Pickering, chief economist at Peel Hunt, told the political component is adding an estimated 10-15 basis points to current gilt yields, and that a formal leadership challenge could push them higher still.