By Yoruk Bahceli
LONDON, May 12 (Reuters) - UK borrowing costs neared their highest since 2008, sterling slumped and shares fell on Tuesday as investors brace for a potential change of leadership that could
endanger the fiscal rigour of the Keir Starmer government.
Starmer was consulting colleagues about whether he can stay on as prime minister on Tuesday ahead of a crunch cabinet meeting that comes after ministerial aides quit and almost 80 lawmakers publicly called for him to go following a big defeat at last week's local elections.
The benchmark 10-year gilt yield jumped 11 basis points (bps) to 5.11%, just below the highest levels since 2008 it hit in March on concerns around the inflationary impact of the Iran war.
The 30-year yield, which is sensitive to fiscal concerns, was also up 10 bps at 5.78%, nearing its highest since 1998 touched last week.
The pound dropped 0.5% to $1.354 and was a third of a percent lower at 86.80 pence per euro.
"A managed exit would be our base case scenario," said Jefferies economist Mohit Kumar.
"Any replacement would likely be left leaning and be negative for the long end of the curve and the currency," he said, adding he was positioned for a widening between shorter and longer-dated UK borrowing costs and was betting against the pound.
Stock markets also came under pressure with the FTSE 100 index down nearly 1%.
British also fell with Barclays dropping 4% in early trade, while Natwest and Lloyds were down over 3%.
(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe)
