UK government borrowing costs fell and the pound rose on Friday as Keir Starmer vowed to remain as prime minister despite the Labour party losing hundreds of council seats across England.

Investors calculated that some of the intense pressure on Starmer’s leadership had eased, as Labour appeared on track for smaller losses than election experts had predicted.

The yield – effectively the interest rate – had jumped earlier this week, amid fears that the prime minister could face a leadership challenge if the results from the local elections and the devolved parliaments in Scotland and Wales were particularly poor.

But after Starmer insisted he would not walk away, the yield on benchmark UK 10-year gilts was down 5 basis points, or 0.05 of a percentage point, at 4.89%, outperforming the equivalent US bonds.

Thirty-year bond yields, which hit a 28-year high of 5.77% earlier this week, also fell – down 7 basis points at 5.56%, their lowest in more than two weeks.

The pound had gained three-quarters of a cent against the US dollar by mid-afternoon, and was also slightly higher against the euro.

Matthew Ryan, the head of market strategy at the global financial services company Ebury, said the markets feared higher government spending if Starmer were replaced by a more leftwing rival, such as Angela Rayner, Ed Miliband or Andy Burnham, funded by more tax hikes and higher borrowing.

Neil Wilson, an investor strategist at Saxo UK, warned that “bond vigilantes are lurking”, attuned to the risk of political instability, and the possibility that chancellor Rachel Reeves might lose her job if Starmer departed.

“Political risks associated with a Starmer/Reeves defenestration are bound up with already rising fiscal and inflationary risks for the UK economy,” Wilson added.

Any replacement prime minister and chancellor would face the same challenges as the current leadership, said the City consultancy Capital Economics.

“If Starmer/Reeves were ousted in the aftermath of what appears to be a dire performance by the government in yesterday’s local elections, we suspect the result would probably be higher interest rates and higher gilt yields than otherwise.”

“We doubt a new leadership would be any more successful at boosting medium-term economic growth either, not least because the current fiscal constraints would remain,” Capital Economics added.