# Labour shenanigans, AI mania and the gilt yield myth

_Neil Woodford argues the media's 30-year gilt yield panic doesn't stand up to scrutiny, and that Labour's leadership turmoil will matter little to the UK economy._

Neil Woodford · 14 May 2026 · 8 min read

![Labour shenanigans, AI mania and the gilt yield myth](https://cdn.sanity.io/images/v3acfbvo/production/67b80db55d11034e199be7fead0c436f351beeb7-2254x1399.jpg?w=1600&fit=max&auto=format)

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As I write this week's update the biggest two stories of the week are continuing to unfold.

## Xi-Trump Talks

Trump's state visit to China appears to be going well despite some early potential Taiwan-related tension. The Chinese were apparently keen to draw attention to the issue early in the proceedings in an attempt to dissuade the US from following through on a $14bn arms sale to Taiwan. From the US perspective, this doesn't appear to have caused the war of words the media might have wanted. In fact, US officials were silent on the issue in the immediate aftermath of its publication and the US Secretary of State, Marco Rubio, said that arms sales to Taiwan did not come up in the Xi-Trump talks. He added that "from our perspective, any forced change in the status quo and the situation that's there now would be bad for both countries".

This get together in Beijing could be the first of up to four face-to-face meetings between the two leaders this year. Given this unprecedented frequency of gatherings my guess that US/China geopolitical tension would de-escalate this year and which many readers have questioned, appears to be intact. I was also a little surprised by a US statement that was attributed to both sides stating that the Strait of Hormuz "must remain open" (and not to have a tolling system) and that Iran "can never have a nuclear weapon". Rubio also said that the US would like China to take a more active role in helping resolve the current issues given that it is in their national interest so to do.

## Labour Leadership Shenanigans

The other lead story of the week is, I suppose, the UK Labour Party leadership shenanigans which have followed the party's terrible showing in last week's local and Scottish and Welsh parliamentary elections.

As I write it is still not clear what is about to unfold but, given that the Health Secretary, Wes Streeting, has now resigned and written an open and critical letter to the PM, the likely next step is a formal challenge to Keir Starmer. The media appears to expect that challenge to be joined by others including the ex-deputy PM, Angela Rayner, and possibly the Home Secretary Shabana Mahmood, although Ed Miliband is said not to be keen to join the contest. Andy Burnham, currently the Mayor of Greater Manchester, can't join the contest at the moment because he is not a sitting MP, although many believe he would win it if he was eligible. Unlike the Tory party where leadership elections are decided by the parliamentary party, Labour contests are ultimately decided by the party membership, although to become a candidate, challengers must be sitting MPs and get at least 81 MPs to support their candidacy.

Although it is now clear that there will be a challenge to Keir Starmer and that challenge will be led by Wes Streeting, not much else is. I presume that Mr Streeting assumes he will get to the required 81 MP backing, but that is quite a high bar, and it is by no means certain that other potential candidates would get that level of support. For example, Angela Rayner and Shabana Mahmood may struggle to achieve it. Interestingly, the Streeting letter seems to point to an extended timetable for this contest to play out which might create the opportunity for Andy Burnham to contest and win a by-election, and to then throw his hat in the leadership contest ring. If that happens it is likely that the membership would get behind him, and he would then become the new Prime Minister. If that doesn't happen, in a head-to-head contest between Streeting and Starmer my guess is that Starmer would win with the membership. Either way this omnishambles is likely to run on and on and may only be concluded at Labour's annual party conference in September.

Having said that, I do not agree with Rachel Reeves's commentary on a leadership contest. She has suggested that it will cause chaos in the country, and economic instability. In common with many other things she has said over the last two years, this is utter nonsense. My contention is that businesses and households are little concerned with this contest and will not be changing their behaviour because of it or indeed after it is settled. It is the Labour Party's policies not its personalities that have disabled growth in the economy over the last two years. Despite this mismanagement though, once the conflict in the Persian Gulf is resolved, oil prices will subside as will inflation, and interest rates will inevitably follow. That will in my view unleash significant growth in household spending and lead to higher economic growth regardless of this contest and who its eventual winner is.

## Gilt Yields

Many commentators point to the yields in the gilt market, and particularly to the 30-year yield which is about 5.7%, as an indicator of the financial stress caused by political risk in the UK and to the "chaos" to which Rachel Reeves refers. It is true that this yield is the highest since the late 90s and on the face of it is concerning. But, once again this is not the whole story. The chart below maps the 30-year Treasury yield (right hand axis) and the 30-year UK Gilt yield (left hand axis) over the last twelve months. As the chart shows, there is no blow out in the yield over Treasuries in the last few weeks. Indeed, in the Autumn last year the margin over Treasuries was bigger than it is now.

Alternatively, if we look back at this relationship over the last thirty years (second chart below) there appears to be nothing exceptional about the current yield on 30-year gilts relative to the yield on 30-year Treasuries. What is interesting is that for some time after the financial crisis, from about 2013 until just after the pandemic, 30-year yields in the US were at times higher than 30-year yields in the UK. My best guess for what might have caused this has nothing to do with how much money each government was borrowing, and everything to do with the fact that UK defined benefit pension funds had high demand for this kind of paper.

Indeed, this longer-term chart should be a reminder that in general, the quantity of government borrowing has very little to do with the yield on the paper it is issuing. How else could you explain that over this thirty-year period, the lowest yields on both sides of the Atlantic coincide precisely with the period when both the US and UK governments were borrowing more money as a % of GDP than at any other time in this thirty-year period (during the pandemic).

In other words, yields even at this end of the curve are driven by inflation and inflation expectations and always have been. It's as simple as that. It has absolutely nothing to do with chaos in the Labour party. Right now, the most important issue driving yields at the long end and at ten-year maturities is what's happening to energy prices and the fears central bankers, economists and investors have about high prices continuing and leading to structurally higher inflation in the future. (A belief I do not share)

It's worth making one final point on this issue to close. According to the media, the yield on the 30-year Gilt is some sort of guide to the UK's debt funding cost and is symptomatic therefore of an affordability crisis. Apart from the evidence shown above which I think illustrates clearly that that is a false argument, there are a couple of further points to make here. The first is that the UK's Debt Management Office has indicated that it won't be issuing very many long-dated gilts this financial year. In fact, in total, long dated gilts will account for about 3.2% of total issuance. Consequently, the yield on 30-year gilts so loved by the media as a sign of distress, is in fact utterly irrelevant to the government's debt funding cost for, I expect the remainder of this parliament. This reflects not only the current strategy of the DMO to fund at shorter maturities but also the fact that the average maturity of UK government bonds (at something like 13.4 years) is significantly longer than the average maturity of government debt in most other developed economies (typically 5-8 years).

## Everything else

Having focused on Trump's China visit and the Labour Party's omnishambles, I haven't really commented on the war in the Persian Gulf, nor on the seemingly unstoppable rise of AI-related stocks on equity markets around the world. On the first issue, I still think that a return to military conflict is unlikely, albeit at times it has felt almost inevitable in recent weeks. I still contend that a negotiated settlement is reachable despite the apparent gulf between the two sides at the moment. Clearly one of the problems stems from there being little clarity on who is in charge in Iran and who is making the decisions. Nevertheless, talks are continuing behind the scenes and as long as they are there is hope for an agreement.

As for the inexorable rise of AI-related stocks, the relentlessness of their recent performance has surprised me and many others. The extent of their outperformance is remarkable not just in the current context, but in comparison with long run market history. This table, below, reflects how concentrated the 17% rally in the S&P 500 since the end of March has been.

Whilst current levels of enthusiasm remain, it is hard to see what might undermine this. Having said that, this next chart, showing the scale of the AI IPOs that are scheduled for this summer and comparing that scale with the S&P's long history is worth bearing in mind.

## What to look out for next week

Next week there will once again be a number of interesting macro data releases. In the UK we get unemployment and average earnings data on Tuesday followed by April inflation data on Wednesday which should show a fall in UK inflation. (Can you believe it!) There are also the results of a ten-year gilt auction on Thursday which I will take some interest in as should all those believing in the media's "UK going to hell in a handcart" narrative. We also get retail sales and public sector borrowing data on Friday.

In the US the highlight will be labour market data on Thursday. Corporate news will be light next week and so I expect a lot of attention will be paid to the Iran conflict and to the output from the Trump/Xi summit in China.