Fresh political instability in the United Kingdom spilled over into the country's financial markets on Thursday, heavily impacting the pound and long-dated government bonds. This caused the yield gap between two-year and 10-year UK government bonds to widen to its highest level since 2018, while the pound turned in the worst performance among its peer currencies. The 30-year bond yield also climbed to its highest point since November. The market volatility occurred as doubts increased about Prime Minister Keir Starmer's ability to maintain control, pushing up the political risk premium demanded by investors. Starmer faces mounting pressure over his decision to appoint Peter Mandelson as ambassador to the United States, despite being aware of Mandelson's association with the late, disgraced financier Jeffrey Epstein. Evelyne Gomez-Lecchi, a strategist at Mizuho International, stated, "The Mandelson controversy is rapidly becoming a threat to Starmer and to long-end UK gilts, which remain highly sensitive to any negative political news." The UK yield curve reached its steepest level since 2018. The pound fell by up to 0.7% to $1.3557, its lowest level in nearly two weeks. Options activity for the currency also indicated the most pessimistic sentiment in two months. The 10-year UK government bond yield rose by 4 basis points to 4.59%, widening its spread over the largely unchanged two-year yield to 86 basis points. The 30-year bond yield increased by 5 basis points to 5.38%. Long-term debt is more sensitive to political and fiscal risks, while short-term bonds are primarily driven by monetary policy. The Bank of England is expected to hold interest rates steady later on Thursday. Jamie Sear, a strategist at Citigroup, noted, "While gilts are focused on politics, the short-end of the market will be watching today's Bank of England meeting. The Monetary Policy Committee has little reason to act hastily, especially given recent positive surprises in UK data which have put pressure on gilts. Yesterday's increase in political uncertainty has further intensified the devaluation in the bond market." Downside risks for the pound are increasing. Although long-term UK bond yields remain well below last year's peaks, rising borrowing costs present another difficult challenge for the government, given the Labour Party's poor polling numbers and Starmer's own record-low approval ratings. The party is anticipated to perform poorly in local elections in May. Schuyler Montgomery Koning, a macro strategist, said, "This is a negative signal for the currency, not only because political turmoil is unsettling, but also because any change in leadership could be interpreted as a precursor to fiscal expansion. Given the UK's long-standing challenges with debt financing, the market is certain to react negatively to such developments." Over the past year, the market has been highly sensitive to any speculation about the future of the Prime Minister or Chancellor of the Exchequer Rachel Reeves, operating on the assumption that any successor might be less committed to the UK's fiscal rules. Two weeks ago, UK government bonds faced selling pressure after a potential pathway emerged for Andy Burnham, the Mayor of Greater Manchester, to return to parliament. Burnham, a left-wing rival who has criticized the UK for being overly deferential to markets, is seen as a potential challenger for the premiership. Chris Turner, Global Head of FX Strategy at ING, commented, "The prospect of simultaneous changes in both the Prime Minister and the Chancellor remains one of the core threats to the pound this year. The by-election later this month and the local elections in May mean that British politics will be exceptionally noisy in the coming months."