(Bloomberg) — UK government bonds tumbled after Manchester Mayor Andy Burnham secured a pathway to potentially challenge Keir Starmer as prime minister, threatening political instability that investors fear could result in more expansive fiscal policy.<\/p>\n
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The yield on 30-year gilts, the most sensitive maturity to political risk, surged as much as 20 basis points to 5.86%, the highest since 1998. Concerns about high energy costs and inflation also contributed to the move. Burnham\u2019s announcement that he intends to run for Parliament \u2014 a prerequisite to challenge Starmer \u2014 put the pound on track for its worst week since 2024 against the dollar.<\/p>\n
While there are plenty of hurdles on the path to 10 Downing Street, the prospect of Burnham becoming prime minister is seen as a risk by traders, who fear he might increase public spending and gilt issuance.<\/p>\n
Although Burnham said that his remarks last year about the country being \u201cin hock\u201d to bond markets were taken out of context, they nonetheless spooked investors. He\u2019s suggested there could be an exception for defense spending that would sidestep the government\u2019s fiscal rules.<\/p>\n
\u201cThe market\u2019s fear is that Burnham would be more left-leaning, and we could see a further increase in deficits,\u201d said Mohit Kumar, a strategist at Jefferies. \u201cOur base case is one of a managed exit for Starmer and Burnham likely becoming the next PM. We keep our steepening bias on the curve and an underweight for the currency.\u201d<\/p>\n
The UK\u2019s national debt has swelled sharply since the pandemic and is now at its highest relative to the size of the economy since the 1960s.<\/p>\n
A sweeping defeat for Starmer\u2019s Labour Party to populists Reform UK in local elections last week deepened concerns about his unpopularity with voters. Starmer and his Chancellor of the Exchequer Rachel Reeves are viewed by bond investors as more committed to keeping borrowing in check than their potential replacements.<\/p>\n
Markets are particularly sensitive to the government\u2019s debt sales after former Prime Minister Liz Truss\u2019s unfunded spending plans sparked an exodus from gilts in 2022.<\/p>\n
Global Challenges<\/p>\n
The latest political uncertainty comes against a challenging backdrop as bonds fell globally on Friday amid concern about surging energy prices due to the Middle East war. The yield on 10-year gilts jumped as much as 19 basis points to 5.18%, the highest since 2008.<\/p>\n
Story Continues <\/p>\n
Benchmark UK yields have risen by almost a percentage point since the US and Israel\u2019s attacks on Iran, while traders have flipped pricing for Bank of England monetary policy from interest-rate cuts to hikes as inflationary fears mount.<\/p>\n
Investors suggested gilts will need to fall further before they\u2019ll buy in. Thirty-year yields rising above 6% would look attractive, according to Lauren van Biljon, senior portfolio manager at Allspring Global Investments, and Paul Skinner, investment director at Wellington Management. Lloyd Harris, head of fixed income at Premier Miton, said 10-year yields at 5.30% would start to appeal.<\/p>\n
The pound was 0.5% lower against the dollar at 1.3331 and 0.2% down against the euro at 0.8725 at 5:40 p.m. in London.<\/p>\n
Protracted Contest<\/p>\n
Burnham\u2019s announcement raises the stakes: The Manchester mayor is the only senior UK politician to hold a net positive approval rating among voters, according to YouGov, and is the preferred candidate for many on the left of the Labour Party.<\/p>\n
Late Friday afternoon, a Labour spokesperson said the party\u2019s National Executive Committee had granted Burnham permission to put himself forward as a candidate for an upcoming special election. It\u2019s a reversal of policy since January, when he was denied the chance to run for a separate seat.<\/p>\n
A potential leadership contest could be protracted, with Burnham first having to succeed in a by-election that Nigel Farage\u2019s Reform has vowed to win.<\/p>\n
While they have yet to formally announce a bid, other possible contenders include former Deputy Prime Minister Angela Rayner and Wes Streeting, who slammed Starmer\u2019s administration in his letter resigning from the post of health secretary this week.<\/p>\n
What Bloomberg Economists Say…<\/p>\n
\u201cBurnham has put forward more eye-catching proposals on tax and spending that could put the public finances at greater risk. These include halving the basic rate of income tax and increasing borrowing to fund defense spending. Still, it remains unclear how the constraints of office might temper his ambitions.\u201d<\/p>\n
\u2014 Ana Andrade, an economist covering the UK and the euro area for Bloomberg Economics in London<\/p>\n
Burnham\u2019s various comments regarding fiscal policy over the last year have attracted market attention.<\/p>\n
Following his \u201cin hock\u201d remarks, he said in April that Labour\u2019s budget constraints \u201cwill stay in any context,\u201d while suggesting there could be an exception for defense spending. His argument, he says, is not that Britain can ignore markets, but that tax-and-spending decisions shouldn\u2019t be whipsawed by short-term factors.<\/p>\n
\u201cThe gilt market reaction is to be expected, but once again the gilt market is scared of its own shadow,\u201d said Craig Inches, head of rates and cash at Royal London Asset Management Ltd.<\/p>\n
\u201cBurnham will need to be very gilt market friendly in his comments otherwise the UK headroom will have disappeared before he gets to No. 10.\u201d<\/p>\n
–With assistance from Naomi Tajitsu, Georgia Hall, Alice Atkins and Greg Ritchie.<\/p>\n
(Updates prices and adds Labour\u2019s decision on Burnham in paragraph 15.)<\/p>\n
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