Bruising brushes with financial markets have been the fate of Labour “down the ages”, said William Keegan in The Observer. Back in the 1960s, Harold Wilson complained about “the gnomes of Zürich” – a derogatory reference to international bankers then going “short on the pound”. This time, the threat is closer to home – in London’s febrile government bond markets.‘The risk of some kind of accident is real’Before this week’s escalation of the leadership fight, economists were playing down the political angle. “For all the noise, politics isn’t what’s driving yields higher right now,” James Smith of ING told The Times. “The overwhelming driver is still the energy crisis, oil prices and the impact on BoE interest rates.” But as a dramatic sell-off got under way, it became harder to discount the sense that debt markets are indeed badly rattled by Labour’s leadership woes. The 30-year gilt yield, which hit 5.81% on Tuesday, is at the highest this century. Yields on 10-year gilts (the benchmark for mortgage rates), at 5.13%, are at their highest since 2008.It’s “a rubbish time” to be having a political crisis, said Daire MacFadden in the Financial Times. “Sadly, that’s precisely what we have.” Any leadership challenge is “all but certain to herald a move to the left and potentially an increase in government borrowing”. To some extent, the gilt market had already priced this in, but “the risk of some kind of accident here is real”.