Investors remain calm despite political chaos

UK Government borrowing costs rose slightly as investors watched the latest political turmoil.

However, while interest rates - or yields - on government bonds climbed, they were still below levels that had been seen earlier in the week.

One analyst said the markets were "watching in a kind of stunned, open-mouthed horror" at political events.

However, he added markets had not moved much, as investors are waiting for the next development.

"Markets are simply voting machines about what they expect will happen next," Bill Blain of Shard Capital told the BBC's Today programme. "So the markets really need a signal and if we get a positive signal will go up.

"The problem we've got is that the last couple of weeks has really destroyed the image of political competency and that's one of the key elements to make any economy work.

"There are three things you need: you need a stable currency, you need a sustainable bond market and you need competent politics, and because it looks like competent politics are broken that's creating the volatility that we're seeing in markets."

Prime Minister Liz Truss is under renewed pressure after the home secretary quit on Wednesday and MPs took part in a chaotic vote on fracking.

Government borrowing costs rose sharply last month after it unveiled a tax-cutting mini-budget without saying how it would pay for it.

But these costs then fell back after the Bank of England stepped in with its emergency support programme, and after Jeremy Hunt reversed nearly all the mini-budget measures when he became chancellor.

The government can raise money by selling bonds - also known as gilts - to investors. Bonds are a bit like an "I owe you".

Typically, the government agrees to repay the investor on a certain date in the future. In the meantime it pays interest on the loan.

However, the mini-budget hit confidence in bonds, and led to investors demanding a much higher rate of interest in return for investing in them. Some bonds halved in value.

The interest rate - or yield - on UK government bonds for borrowing over a 10-year period climbed above 4% at one point on Thursday morning, although this only brought the rate back to the level it had been 24 hours earlier.

The rate remains below the levels seen in the immediate aftermath of the mini-budget, but it is still higher than before the announcement.

Analysts said UK borrowing costs were still higher than in similar countries.

Simon French, chief economist at Panmure Gordon, told the BBC: "The UK Government can borrow for 10 years at about 4% - that number has come down in recent days, but it's [the UK Government] paying about 0.75% more than it really should be if you benchmark the cost of government debt against other comparable countries.

"That progress in getting that interest rate down will have been stalled by yesterday's events."

The pound remained steady against the US dollar on Thursday, trading at about $1.12, although this is lower than the level of $1.14 it hit on Monday following the announcement that most of the mini-budget measures were being scrapped.