With UK gilt yields still slightly lower today (see here), and warnings that oil inventories could soon hit a record low (see here), it’s time to wrap up.

Here are today’s main stories:

Our Politics Liveblog has all the details on the political crisis gripping the bond markets:

Overseas investors are playing a “particularly large role” in buying UK government debt, and that leaves the British bond market vulnerable in an “increasingly shock-prone world”.

That’s according to Bank of England policymaker Catherine Mann, who is arguing in a speech today that the presence of these “new actors on the financial side” add to the challenge of managing the UK’s persistent current account deficit.

Mann says that this change in the the investor base for gilts will likely will affect the cost of borrowing on international markets – as non-domestic buyers might be more susceptible to selling gilts (pushing up yields).

And that could have an impact on interest rate policy. Mann (a member of the Bank’s monetary policy report) explains:

On the financial side of the balance of payments, the marked shift in the composition of gilt holders over time, away from domestic, long‑term, relatively stable investors and towards new actors that are more foreign, price-elastic, leveraged, and with shorter-duration portfolios may affect the monetary policy landscape.

Mann explains that if a new shock were to occur , the “more price-elastic international investors” could respond by reducing their gilt holdings. The resulting volatility in yields could be reflected in a persistent risk premium on gilts, she warns.

The world’s oil stockpiles are being drained at a record rate and could reach an all-time low by the end of the month, according to market analysts.

The International Energy Agency warned on Wednesday that inventories of crude oil and fuels fell by an average rate of 4m barrels of oil a day last month to make up for the shortfall of energy exports from the Gulf.

The record drain on stored oil risks future oil price spikes as the world’s supply buffers shrink, the global energy watchdog added.

The world had an estimated 8.2bn barrels of oil in storage before the US-Israeli war on Iran led to an effective shutdown of Gulf oil exports via the strait of Hormuz and erased around 15m barrels of oil a day from the global market.

Analysts at investment bank UBS believe that stocks may have fallen to 7.8bn barrels at the end of April and by the end of May could approach all-time lows of roughly 7.6bn barrels, if oil demand remains broadly in line with last month.

“The world is drawing oil inventories at a record pace as importing countries confront unprecedented disruptions to Middle Eastern supplies,” the IEA said in its monthly oil market report.

The Paris-based agency added:

“Rapidly shrinking buffers amid continued disruptions may herald future price spikes ahead.”

The IEA expects further draws from the world’s oil stocks in the months ahead as fresh supplies of crude production are consistently outpaced by the world’s appetite for crude and fuels.

Oil supplies are forecast to be on average around 1.78m barrels of oil a day lower than the world’s oil demand this year, according to the IEA, but the deficit could be as steep as 6m barrels a day in the second quarter of the year.

“Our latest supply and demand estimates imply that the market will remain severely undersupplied through the end of 3Q26, even assuming the conflict ends by early June,” it said, adding that the second-quarter deficit will be as stark as 6 million bpd.

The IEA’s 32 members agreed to a historic coordinated release of 400 million barrels of oil from the world’s strategic reserves in March in a bid to calm markets. It said around 164m barrels of that total has already been released.

The higher-than-expected jump in US producer price inflation (see previous post) has pushed up the US dollar.

Traders are calculating that the 6% jump in wholesale prices, on an annual basis, will deter the US Federal Reserve from lowering interest rates.

The dollar index, which tracks the US currency against a basket of currencies, has risen by 0.25%. The pound has dropped to a new two-week low, below $1.3490.

Newsflash: US goods and services producers are raising their prices at the fastest rate since the start of the Ukraine war four years ago.

The Producer Price Index for final demand increased 1.4% in April, seasonally adjusted, the US Bureau of Labor Statistics has just reported.

That’s the largest advance since the PPI index rose by 1.7% in March 2022.

On an annual basis, the index for final demand rose 6.0% for the 12 months ended in April, the largest 12-month increase since moving up 6.4% in December 2022.

The BLS reports that over 40% of the April advance in prices for final demand goods was due to a 15.6% increase in the index for gasoline, adding:

Prices for jet fuel, diesel fuel, fresh and dry vegetables, industrial chemicals, and residual fuels also rose. In contrast, the index for chicken eggs dropped 49.7 percent.

Oil cartel OPEC has cut its forecast for crude demand this year.

OPEC now expects global oil demand to grow by “a healthy 1.2 mb/d in 2026”, in its latest Monthly Oil Market Report.

That’s down from its forecast in April, and March, that demand would rise by 1.4 million barrels a day this year.

Opec also predicts that oil demand in the OECD group of advanced economies will rise by 100,000 barrels a day this year, while non-OECD oil demand will rise by 1.1 mb/d, driven by China, India and “other Asia” countries.

The group, which includes Saudi Arabia, Iraq, Iran and Kuwait (but no longer the UAE, which quit last month) also raised its forecast for 2027 oil demand growth, by around 200,000 barrels a day.

The pound has dropped to its lowest level in almost two weeks following reports that health secretary Wes Streeting is preparing to trigger a leadership contest.

Sterling dropped to $1.3492, the lowest since Thursday 30 April, as investors reacted to the prospect of Streeting resigning tomorrow.

Neil Wilson, investor strategist at Saxo UK, says:

The report produced an immediate reaction in edgy gilt markets with the 30-year jumping more than 5bps to 5.80% again whilst the 10yr broke above 5.125%...both now trading close to flat after opening a bit lower this morning. It’s clear that bond markets are very sensitive to headlines but we have not had confirmation yet as to any move to trigger a contest. However, as detailed this morning it seems increasingly clear that Starmer cannot hold on and I expect a move to happen once the King’s Speech is out of the way.

The read across for sterling was negative as GBPUSD slunked to fresh lows of the day to test the 1.350 support, dipping below this level to hit a two-week low.

UK government bond yields have stopped falling, following a report that health secretary Wes Streeting is ‘preparing to resign’.

The Times are reporting that Streeting has told allies that he is preparing to resign and trigger a leadership contest as soon as tomorrow.

The prospect of a challenge to Keir Starmer has wiped out the (small) recovery in UK short and long-term borrowing costs we’d seen earlier this morning.

Two, 5, 10 and 30-year bond yields are now broadly flat, back where they ended last night after political uncertainty triggered a surge in borrowing costs.

Some of the early recovery in UK bonds this morning is slightly unwinding.

Ten-year and 30-year bond yields are still lower today than last night, but only slightly – both measures are only down 2 basis points (0.02 of a percentage point) now.

Reto Cueni, chief economist at asset manager Syz Group, says investors are concerned that a Labour leadership battle would lead to a weaker commitment to fiscal consolidation, higher public spending, more interventionist labour-market policies, and more taxes on busineses.

Cueni argues that bond markets would “quickly punish any abandonment of fiscal consolidation”, and warns that political headlines feed directly into funding costs far more rapidly than before, since the Liz Truss mini-budget disaster of 2022 (when bond yields jumped and the pound plunged).

Cueni also claims there is a high risk of “another Liz Truss moment” if the UK’s political leadership will change or if the current leaders will opt to call for substantially more fiscal loosening.

Ultimately, the bond market may once again be the main constraint on UK fiscal policy. Much like during the Truss episode, gilts are acting as the transmission mechanism through which political uncertainty is disciplined. The message from rates markets is increasingly clear: bond investors are not willing to finance UK government debt easily when fiscal credibility is threatened, especially in an environment already prone to inflationary pressures.

The average wheat farmer in the UK could make a loss of £70,000 on their 2027 crop as costs skyrocket due to the war in Iran which has caused shortages of supplies from the Gulf, according to new analysis from the Central Association for Agricultural Valuers.

With farmers making decisions about 2027 cropping now, the economic outlook means they could be making difficult decisions such as leaving fields fallow.

Jeremy Moody, the secretary of the CAAV described the crisis in the Gulf as the “fifth hammer blow to arable economics after the last three problematic harvests and the present one, moving into territory where the combination of strained cash flow and credit with current prospects opens up the prospects of a significant fall in cereals planting this autumn.”

His analysis shows that this loss would mean farms are now at the point where losses from crops now outweigh any additional income the average farmer would get from environmental schemes or farm diversification.

Moody adds:

“Many will be in a worse position than that; some will be better. The overall position points to discussion of what areas might not be planted this autumn rather than voluntarily spending money to incur that loss. It would be natural for these issues to be sharpest for those areas that made disproportionate use of set-aside above the minimum required levels.”

He said that as well as the issues with fertiliser and energy costs, farmers are battling myriad issues including extreme weather such as drought and flood, uncertainty over the government’s EU reset with fears some produce could end up banned, and the proposed Carbon Border Adjustment Mechanism, expected to add to the cost of imported fertilisers.

Rache Reeves’s headroom to stick within her fiscal rules has shrunk by at least £11bn due to the Iran war, analysts estimate.

In their Mid-Year UK Economics Outlook, released this morning, Morgan Stanley economist Bruna Skarica says:

The hit to headroom from the likely Middle East events-related forecast revision looks to be £11 billion, albeit debt servicing costs pose an upside risk.

That chimes with Goldman Sachs’s forecast that higher gilt yields and lower growth might reduce the government’s fiscal headroom by around £12bn (see earlier post).

At her last budget, the chancellor doubled her “headroom”, or buffer, against her fiscal rules to £22bn.

The jump in energy prices since the Iran war began is driving up inflation, which leads to higher borrowing costs when governments sell debt to bond investors.

It also fuels the cost of living crisis, leaving households with less money to spend in the economy, hurting growth.

Skarica adds:

In any case, political choices remain the key risk for 2027, where we think the skew is towards a wider deficit than our already above-OBR forecast. As noted, we do, ultimately, see limited scope for additional borrowing given market constraints. More broadly, high debt servicing costs likely reflect what the BoE and the Gilt market see as limited spare capacity to absorb additional material fiscal demand.

This perceived resource constraint remains the key barrier to meaningfully expansionary fiscal policy in the near term. Policy recalibration is possible, but the market wants it to happen in a fiscally neutral way.

Global oil stocks are being run down at a record pace as supply losses mount due to the ongoing Iran war, the International Energy Agency has warned.

In its latest outlook report, the IEA reports that global oil inventories fell by 129 million barrels in March, and by a further 117 million barrels in April, as countries dipped into their reserves to cover the shortfall following the Middle East conflict.

The IEA, which ordered the largest release of government oil reserves in its history in mid-March, reports:

More than ten weeks after the war in the Middle East began, mounting supply losses from the Strait of Hormuz are depleting global oil inventories at a record pace.

The IEA also forecasts weaker demand this year, as the jump in prices for crude oil and refined products leads to demand destruction.

World oil demand is forecast to contract by 420,000 barrels per day this year, to 104m bpd, which is 1.3m bpd fewer than it expected before the Iran war began.

It adds:

The petrochemical and aviation sectors are currently most affected, but higher prices, a weaker economic environment and demand-saving measures will increasingly impact fuel use.

A change of Labour leader, and a boost to government spending, is not likely to prompt the Bank of England to raise interest rates, Goldman Sachs argues.

In a new research note this morning, Goldman Sachs economist James Moberly argues that there are “no immediate implications from higher political risk” for the BoE’s monetary policy committee (MPC), which sets interest rates.

He writes:

We see no immediate implications from higher political risk for the BoE. It is possible, of course, that more expansionary fiscal policy under a new Labour leadership boosts demand and inflation, and therefore eventually requires tighter monetary policy.

But our previous analysis does not support the idea that the MPC has historically responded to signs of political risk by raising Bank Rate, for example, in an effort to support the currency.

That suggests that Andy Burnham, for example, could push for higher spending without the risk that the Bank responded swiftly by hiking interest rates.

Burnham has argued that there is a case to consider defence spending outside of the existing fiscal rules, which could allow more overall borrowing.

But, as Goldman Sachs point out, any prime minister’s policy choices will” remain constrained by the challenging backdrop of rising spending pressures and an already elevated tax burden.”

Moberly also explains that “the bulk of the selloff” in UK government bonds since the Iran war started is because investors have repriced the outlook for UK interest rates, rather than due to political risks.

He expects the Bank of England will leave interest rates on hold this year, although if energy price pressures keep building it could raise borrowing costs this summer.

UK government bond prices are rallying at the start of trading, pulling down borrowing costs.

Investors appear relieved that Sir Keir Starmer is holding onto power this morning, after a challenge from health secretary Wes Streeting failed to materialise.

The yield, or interest rate, on 30-year UK government bonds has dropped by 4.4 basis points (0.044 of a percentage point) in early trading to 5.72%. Yesterday it hit a 28-year high of 5.81%, before a small recovery as Starmer faced down the threat of a cabinet rebellion.

Benchmark 10-year UK bond yields are dropping too – down 4bps to 5.06%, so still over the 5% mark.

These are relatively small moves in borrowing costs, but crucially for Downing Street they show that some calm is returning to the bond market.

As our politics team reported last night:

Streeting was due to hold talks with Starmer on Wednesday, at which he was expected to talk candidly about his concerns, with No 10 insiders suggesting he was climbing down from intense speculation that he was on the brink of running.

Lloyd Harris, head of fixed income at Premier Miton Investors, argues that the ‘Starmer drama’ shows that the key issue is government credibility.

The Labour Party is not driven by one individual. It is shaped by its internal dynamics and by its union base, both of which tend to favour a more expansive fiscal stance. Markets understand this. They do not price the best-case scenario, they price the probability weighted outcome. Where fiscal discipline risks giving way to political pressure, yields adjust accordingly.

The reaction to Andy Burnham’s comments was telling. His remark that the UK has to “get beyond this thing of being in hock to the bond markets” reflects a strand of thinking within the party that markets instinctively reject, not the rhetoric itself, but for what it implies about relaxing fiscal constraints.

Bond markets do not need to be challenged; they need to be convinced. When policy signals suggest those constraints may be ignored, investors respond through pricing. Often labelled as bond vigilantes, but in reality, it is a straightforward repricing of risk.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The UK bond market is bruised this morning after a day of political turbulence drove up Britain’s borrowing costs.

UK long-term bond yields hit their highest levels in 28 years on Tuesday, as fears about a change of Labour leadership triggered investor jitters and warnings of further bond market turmoil.

But this morning, Keir Starmer remains in post having fought back against pressure to lay out a departure timetable, with health secretary Wes Streeting not (yet, anyway) having launched a challenge.

Many investors have warned that if Labour tilted to the left, the bond market would balk at the prospect of higher borrowing and spending.

But the prospect of Reform winning the next election, and Nigel Farage entering Downing Street, appears to also be a factor pushing up yields, after the party made gains in last week’s local elections.

Ipek Ozkardeskaya, senior analyst at Swissquote, explains this morning:

Brits are grappling with their own political shakeups after Nigel Farage scored big in the latest elections. The name Farage resonates in markets as a clearer path toward looser fiscal policy, higher spending and larger deficits, just as investors are already worried about Britain’s debt and inflation outlook.

That combination is pushing investors to demand higher compensation to hold UK government debt, sending the UK 10-year gilt yield back above 5%. That’s the highest level since 1998. The higher the borrowing costs, the less the government can borrow, and the impact on growth would be negative.

Yesterday’s sharp moves in bond markets were clearly triggered by the crisis gripping the Labour government, with Streeting supporters pushing for a swift resolution, while allies of Greater Manchester mayor Andy Burnham arguing he’s the answer to the current malaise (if he could return to parliament)

But earlier this week, market strategist Bill Blain of Wind Shift Capital argued that investors might not see Reform as a ‘safe pair of hands’, writing:

Who in Reform is going to run the bond market / spending plan optimisation game? What are they going to do to solve the housing crisis – which isn’t about building 1.5 mm executive homes in the next 3 years but about supplying decent social and affordable housing for young people to have housing security and start family formation? Who in Reform will be looking at the welfare budget (which now pays £39 bln (2/3 of the defence budget) on housing benefits? Who in Reform will be making the calls on the NHS, Defence and, yes, the greatest immediate challenge to England since the Armada hove into view – filling potholes?

Reform has clear intent to govern. Over the next three years – how will they persuade the bond market they can?

The UK government will outline its legislative plans today in the King’s Speech, which could also bring Starmer some respite from troublesome ministerial resignations and demands for his resignation.

The agenda

• 9am BST: IEA monthly oil market report

• 10am BST: Eurozone GDP report (latest estimate for Q1 2026)

• 1.30pm BST: US producer prices inflation report for April

• 3pm BST: Bank of England policymaker Catherine L Mann to release speech on ‘The UK’s international exposures and vulnerabilities’