- UK bond yields rise to highest since November
- Gap between 2-and 10-year yields widest since April
- Starmer under pressure to explain Mandelson appointment
- Sterling falls 0.7% against US dollar
LONDON, Feb 5 (Reuters) - British borrowing costs rose on Thursday as concerns grew over whether Prime Minister Keir Starmer could survive the fallout from his decision to appoint Peter Mandelson as U.S. ambassador despite knowing about his ties to Jeffrey Epstein.
Longer-dated British government bond yields rose for a second day on Thursday, while European borrowing costs remained flat, as investors questioned whether Starmer could remain in office, just over 18 months after he won a landslide election victory.
If Starmer - and possibly his finance minister Rachel Reeves - were replaced, markets were unsure whether a new Labour leader would stick to the government's current borrowing limits.
Ten-year gilt yields rose to the highest since November 20, up about 3 basis points on the day, to 4.605% at 1031 GMT, and were last up around 4 bps.
Thirty-year bond yields , which are sensitive to concerns about future borrowing, touched the highest since November 21 - before Reeves delivered her second budget - up around 7 bps at 5.406%.
The gap between two-year and 10-year yields rose to 85.5 bps, around its highest since last April's seven-year peak, according to LSEG data.
STARMER'S LEADERSHIP UNDER PRESSURE
Gilt yields had also risen late on Wednesday.
Starmer has come under huge pressure in recent days to explain why he appointed Mandelson as his U.S. envoy when the vetting process had flagged that he had an ongoing relationship with the late sex offender Jeffrey Epstein.
Critics in opposition parties charge that the government wanted to appoint the Labour Party veteran because they believed he would be able to handle U.S. President Donald Trump, meaning they may have overlooked any concerns that were raised.
Starmer has said Mandelson lied repeatedly about the depth of his ties to Epstein.
The furore dominated the front pages of the newspapers in Britain, with the Daily Mail saying Starmer was in "grave peril" and the Times stating that he was fighting for his future.
Cathal Kennedy, senior UK economist at RBC, said markets were concerned about who might replace Starmer and what that means for the direction of fiscal policy over the remainder of Labour's time in parliament.
The Eurasia Group, a political risk consultancy, put the probability of a leadership challenge and Starmer's removal this year at 80%, up from 65% previously.
"If Starmer were to step aside, and it's still an if at this stage, Angela Rayner would be the favourite to take up the mantle of Prime Minister," Matthew Amis, investment director for rates management at fund manager Aberdeen Investments, said.
"Rayner is seen as more left-leaning and therefore the market would expect looser fiscal policy and a greater supply of gilts."
The pound fell 0.7% on the day to around $1.356, making it the worst-performing major currency against the dollar, which staged a broad rally.
Expectations for rate futures were little changed. The Bank of England is expected to keep its main interest rate at 3.75% on Thursday, after cutting rates four times in 2025, and investors are pricing in one or two more reductions in borrowing costs this year.
Reporting by Suban Abdulla, Kate Holton and Amanda Cooper; Editing by William Schomberg, William James and Toby Chopra
Source: Reuters