UK borrowing costs spiked to a 28-year high yesterday as fears of a Labour Left-wing coup spooked bond markets.

Investors dumped UK bonds as leadership speculation grew ahead of tomorrow's local elections.

A trouncing for Labour will stoke fears of a challenge to Sir Keir Starmer from the likes of Angela Rayner, Andy Burnham or Wes Streeting with Ed Miliband potentially taking on the role of Chancellor.

Markets fear that could stoke a backbench clamour for a loosening of the financial rules that limit spending and borrowing.

That has piled on top of the worries gripping bond markets across the world as a result of the Iran war.

But it is UK bonds, known as gilts, that have borne the brunt of the sell-off.

Yields on gilts, which rise as their prices fall, climbed as high as 5.79 per cent, the highest level since 1998, yesterday. Ten-year gilt yields rose to more than 5.1 per cent, heading towards highs seen in March which have not been matched since the financial crisis in 2008.

Both are above the levels seen in 2022 in the aftermath of Liz Truss's disastrous mini-Budget – an episode that Labour repeatedly wielded as an electoral weapon on its way to power two years later.

Gilt yields are effectively the rate of return demanded by investors for lending to the government.  When they rise it means the government has to spend more to finance its spending plans.

That shrinks the 'headroom' available to Chancellor Rachel Reeves to meet fiscal rules, under which she must seek to bring down borrowing and debt.

Britain is already saddled with the highest borrowing costs among the G7 group of advanced economies, thanks to its stubbornly high inflation and towering levels of public debt.

Tory shadow chancellor Sir Mel Stride blamed latest investor nerves on the 'increasingly weak and chaotic Labour leadership'.

He added: 'Reeves and Starmer have racked up borrowing while taxing the life out of our economy, and we are paying well over £100 billion a year just to cover the interest on our debt.

'The country is paying the price for Labour's recklessness.'

The turmoil comes at a time when officials from the International Monetary Fund (IMF) are understood to be in Britain running the rule over the economy ahead of their annual assessment, with the cost of UK borrowing likely to be among their key concerns.

Danni Hewson, head of financial analysis at investment platform AJ Bell, said: 'The prospect of a period of political upheaval is taking its toll in the UK.

'The yield on 30-year gilts has shot up… as investors weigh up how fiscal policy might be impacted if a massive Labour drubbing in this week's local elections results in a vote of no confidence for Keir Starmer.

'A new PM would likely mean a new chancellor, and one who might be more inclined to turn on the spending taps at a time when the country is faced with stagnant growth and another cost of living crisis.'

The surge in bond yields 'is a symptom of nerves about rising inflation as the situation in the Middle East remains highly uncertain', Ms Hewson said.

But she added: 'It is being felt more acutely in the UK as the country has proven more susceptible to energy price shocks.

'Far from just being numbers on a spreadsheet, it makes doing stuff more expensive for the government and increases the interest paid on the huge debt pile run up during recent economic struggles. This limits what could be done by any keen new broom sweeping through Downing Street.'

The latest market turbulence came as fears of an end to the fragile US-Iran ceasefire grew over the weekend, resulting in further oil price volatility.

That sent bond yields surging in the US and across Europe on Monday. The sharp move for gilts yesterday was partly as a result of Britain playing catch-up after UK markets were closed for the Bank Holiday on the previous day but experts said it also reflected growing nerves over politics.

Thomas Pugh, chief economist at accountancy firm RSM UK, said: 'There is a growing risk that the UK lurches from an energy crisis straight into a political crisis, which results in another bout of uncertainty, and even higher borrowing costs.

'This would almost certainly ensure that 2026 is another year of stagnation for the UK economy and increases the likelihood of the economy slipping into a recession.'