Bond vigilantes are now actively circling the United Kingdom as inflation from higher energy prices threatens the government’s delicate fiscal position and the ruling Labour Party suffered heavy losses in the local and regional elections.
British prime minister Keir Starmer struck a defiant tone in the face of calls from some of his MPs to quit, insisting he remained as determined as ever to deliver on the promises on which he was elected less than two years ago.
However, even before the election result, the yield on 10-year UK bonds (gilts) soared to their highest since 2008, breaching the 5 per cent barrier, as war in the Middle East threatens to shrink tax receipts and evaporate fiscal headroom.
PrepayPower are hiking their prices – will other energy suppliers soon follow suit?
The brewing political turmoil in Downing Street could trigger another hike in UK borrowing costs.
Bond markets fear the election result could topple the Starmer-[Rachel] Reeves regime, heralding a leftward shift with consequences for investors.
“The market is worried about a) political uncertainty and b) that any replacement of the Starmer-Reeves regime would be from the left, implying more spending and potentially unwinding all the fiscal repairs carried out at the last budget,” said Neil Wilson of Saxo Bank.
“In the budget last November, the chancellor’s move to raise taxes and fiscal headroom eased concerns about debt sustainability and immediate fiscal risks,” he said. “Reeves is seen as the most ‘market-friendly’ possible candidate as chancellor within the government.”
The front-runner to succeed Starmer, Andy Burnham, has talked about how the UK should not be “in hock” to bond markets; the sort of language that markets hate.
Former prime minister Liz Truss’s failed tax-cutting budget triggered a run on British government bonds, a surprise Bank of England intervention in late 2022, and an eventual toppling of her government.
The fears of a similar attack by bond vigilantes could dissuade some in Labour from calling for Starmer’s head.