By Harry Robertson <\/p>\n
LONDON, July 7 (Reuters) – Britain’s brittle bond market is looming large over Andy Burnham, Britain’s likely next prime minister, and could constrain what the left-leaning former mayor of Manchester can do in office. <\/p>\n
Burnham has already moved to calm investors’ nerves over a potential \u200cspending surge by promising to stick to the government’s current fiscal rules. <\/p>\n
Yet Prime Minister Keir Starmer has left him with a \u00a34.7 billion ($6.27 billion) funding \u200cgap for defence, suggesting he use the government’s “headroom” against the spending rules to plug it. <\/p>\n
Burnham has had some good fortune, however. Britain’s bond yields – and so government borrowing costs – have fallen sharply as \u200ba U.S.-Iran deal has caused oil prices to tumble. <\/p>\n
Here are the key pressure points facing Burnham in the bond markets: <\/p>\n
Yields on benchmark 10-year bonds are higher than in other rich economies and hit an 18-year peak in May as the Iran war drove up energy prices. <\/p>\n
Britain has struggled to tamp down inflation in recent years, keeping interest rates high. High public debt, and the scars of the Liz Truss mini-budget crisis in 2022, have also been factors keeping yields elevated. <\/p>\n
Yields dropped as bonds rallied in \u200cmid-May when Burnham committed to the fiscal rules, although the \u2060main driver was the developing U.S.-Iran peace agreement which pulled down borrowing costs globally. <\/p>\n
Markets are keen to hear who Burnham’s choice of finance minister, or chancellor, will be and whether he will ultimately bend the fiscal rules slightly. <\/p>\n
“When the government returns in \u2060September … that’s when things really heat up,” said Neil Mehta, portfolio manager at RBC BlueBay. <\/p>\n
“That’s when you start to hear rumours about policy changes and that’s when the gilt markets become a bit more nervous.” <\/p>\n
Burnham will have to contend with a UK bond market and economy that’s vulnerable to energy shocks. <\/p>\n
Britain is an energy importer with low levels of \u200bstorage \u200band a gas-driven electricity pricing model, which has pushed up its bond yields more than \u200bothers during the war. <\/p>\n
Mustafa Oguz Caylan, G10 rates strategist at UBS, \u200csaid longer-dated bonds are more sensitive to inflation in the UK than the U.S. and Europe. <\/p>\n
“That partly has to do with the UK having very high inflation-linked debt, roughly 25%,” he said. “The dislocation in the gilt market in 2022 is also another factor.” <\/p>\n
Debt interest spending was \u00a33.3 billion above forecasts in May alone as inflation pushed up payments on inflation-linked bonds, according to the Office for Budget Responsibility. <\/p>\n
The government borrowed hundreds of billions of pounds to support the economy through COVID-19, then was rapidly hit by the Ukraine war energy shock, keeping bond issuance high. <\/p>\n
Meanwhile, the Bank of England is actively selling its pandemic-era bond holdings, adding to the pressure \u200con markets to absorb the debt. <\/p>\n
“The positive I see is that the level of gilt \u200byields is so front and center of the political discussion,” Kim Crawford, global rates portfolio manager \u200bat JP Morgan Asset Management, said at a conference last month. <\/p>\n
“I think \u200bthere is an understanding that budget constraints are tighter now.” <\/p>\n
It’s not all gloom, however. <\/p>\n
International factors are typically the biggest driver of \u200cUK bond markets, and the U.S.-Iran framework deal has let \u200benergy flow through the Strait of Hormuz and \u200boil prices slide back to pre-war levels. That has prompted traders to sharply scale back their bets on central bank rate hikes. <\/p>\n
“We are positive on the outlook for UK gilts,” said James Bilson, a fixed income strategist at Schroders. <\/p>\n
“In our view, most indicators point towards policy easing in the \u200bUK rather than tightening.” <\/p>\n
Yet many of the underlying fiscal \u200cproblems that weighed on Starmer will remain. <\/p>\n
Britain spends around 9% of its revenues on debt interest, which is forecast to be roughly \u00a3109 billion \u200bin 2026\/27, compared to around \u00a368 billion on the defence budget, highlighting the trade-offs Burnham will soon have to face. <\/p>\n
($1 = 0.7495 pounds) <\/p>\n
(Reporting by \u200bHarry Robertson; Additional reporting by Naomi Rovnick; Editing by Amanda Cooper and Ros Russell) <\/p>\n","protected":false},"excerpt":{"rendered":"By Harry Robertson LONDON, July 7 (Reuters) – Britain’s brittle bond market is looming large over Andy Burnham,…\n","protected":false},"author":2,"featured_media":78157,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[2],"tags":[7786,13387,13,10618,16162,94],"class_list":["post-78156","post","type-post","status-publish","format-standard","has-post-thumbnail","category-britain","tag-andy-burnham","tag-bond-market","tag-britain","tag-fiscal-rules","tag-government-borrowing","tag-keir-starmer"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116877310378591586","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/78156","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=78156"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/78156\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/78157"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=78156"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=78156"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=78156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}