WeekWatch

Local elections and government borrowing

Following bruising local election results, media reports have been awash with gossip around the prime minister Keir Starmer’s future. Judging by the UK bond market, however, lenders appear to prefer the stability of continuity over the uncertainty of a leadership challenge – at least for now.

UK borrowing costs haven’t been kind to the current government. Since the general election nearly two years ago, 10-year gilt yields (i.e. the interest the government pays on the bonds) have climbed from under 4% to a peak of over 5%. 

Higher yields make life difficult for governments, as it means more expensive borrowing, limiting their options around taxes and spending. 

Many of the causes of this rise are outside the government’s direct control – an aging population, a large debt pile and the actions of foreign powers, for example.

Over the past two weeks, a combination of high oil prices and local election predictions helped 10-year gilt yields spike to over 5% for the first time since 1998. 

UK local elections

The impact of local elections was especially notable on Tuesday last week, when gilts reached their highest point, before gradually falling back down below 5%. 

With Reform and Green waves expected at the expense of traditional parties, rising yields were a good way to gauge market views on the potential uncertainty this could mean if mirrored at the next general election, due before 15 August 2029. 

In the end, there was a big swing to Reform, with the party winning with the largest number of councillors. Labour and the Conservatives were the big losers of the day.   

However, bond investors were left with some encouragement after Starmer reiterated his plan to stay the course of this government. However, with yields hovering near 5%, and numerous reports of plans to oust him, clearly this optimism only went so far.

A potential end to the Iran conflict

Beyond domestic politics, investors took comfort in reports that a peace deal was looking more likely in Iran. 

Notably, oil prices plunged on Wednesday after reports emerged of a one-page memorandum of understanding that was close to being agreed. WTI crude oil fell from over $100 a barrel to just over $90, before ending the week just north of $95. This is still a long way off the sub-$60 prices it was trading before the Iran crisis.  

This optimism began to fade over the weekend, following reports of more tankers being hit and seized. Hopes were further dented on Monday, when Trump described Iran’s peace proposal as ‘unacceptable’. Oil prices rose as a result. 

US market optimism

One market that has come out of the Iran conflict well has been US equities. Last week it posted another strong set of returns, as it moved higher into record territory.

Much of this growth has been driven by technology companies. Initially, large tech companies struggled at the start of the year, due to investor concern over the high level of AI spending, and how long it would take for that to translate into returns. It appears some of these fears have subsided. Since their March lows, the tech sector has recorded double-digit growth. Chip makers such as Intel and AMD have seen the value of their companies double over the past month. 

Shares have more generally been helped by the recent earnings season, which went better than many expected. Importantly, the wider performance reflects growing optimism that the impact of the Iran war will be short-lived.   

However, Carlota Estragues Lopez, Equity Strategist at SJP, warns some of this optimism may be premature. She notes: “Equity markets have been quick to price in the de-escalation narrative. but less patient in pricing the economic damage of the conflict. One risk that may be underappreciated is that inflation doesn’t need to reaccelerate sharply to matter, it just needs to remain sticky enough to keep pressure on earnings expectations. So, while the index rally makes sense if the worst outcomes are avoided, the overlooked risk is complacency around inflation persistence.

“The first quarter earnings season covers results announced from mid-February to mid-May and doesn't capture the full extent of the impact of the conflict. Even in a contained scenario, we still have to work through issues like inventories, insurance costs, shipping routes and margin pressure, which may become more evident in second quarter earnings season."

Finally, Friday saw some good news on the US jobs front. A total of 115,000 non-farm jobs were added in April, above expectations. Wage growth ticked up slightly to 3.6%, but this wasn’t enough to reverse the longer-term downward trend.

Together, these figures suggested the labour market remains relatively healthy. However, it will not have been enough to move the needle for the Federal Reserve, which will likely keep its focus squarely on inflation when it next meets to discuss interest rates.

Affordability for homebuyers at most stretched since 2008

Homebuyers committed more than a fifth (21.3%) of their gross income to meeting mortgage payments in 2025, the highest level since the global financial crisis.

This is according to a UK Finance report, which highlights intensifying affordability pressures on homebuyers across the country.1

But despite increased costs, house purchase mortgage completions increased by 17% year on year in 2025, to 723,000.

The report also reveals pressures for borrowers across the buy-to-let sector, where returns have been reduced. Many landlords have already chosen to exit the market. 

Stamp duty surcharges, the progressive removal of income tax relief for mortgage interest, higher mortgage costs and stricter underwriting standards have all contributed to a much more challenging environment for landlords.

The Renters’ Rights Act, which came into effect on 1 May, will likely add further costs and an increased administrative burden on beleaguered landlords. 

Mental Health Awareness Week 2026

This week marks Mental Health Awareness Week, an annual campaign designed to shine a spotlight on issues around mental health. 

The initiative, which is run by UK charity Mental Health Foundation, aims to involve everyone in starting a conversation, offering support, and speaking up for change to improve mental health 

The theme this year is ‘action’, with the charity encouraging people to do something for themself or for someone else to support good mental health.

Money worries can become an unwelcome source of stress. There are a number of small steps that could help improve someone’s financial wellbeing and mental health, such as:

• Starting a small emergency savings fund. Having a buffer could improve your sense of security.
• Talking to a trusted friend, family member or professional adviser about any financial concerns.
• Automating positive actions, such as regular saving and bill payments to reduce decision fatigue.

Source

¹ UK Finance, Loans Where We Live: Regional mortgage market compendium 2026 – May 2026