The potential pathway for Manchester Mayor Andy Burnham to challenge Keir Starmer for the UK Prime Minister's position has triggered a sharp sell-off in UK government bonds. Investors are concerned this could lead to renewed political instability and potentially more expansionary fiscal policies. Amid global worries over high energy costs and inflation, the yield on the 10-year UK gilt surged by as much as 12 basis points to 5.11%. Burnham's announcement of his intention to run for a parliamentary seat—a prerequisite for challenging Starmer—has contributed to the British pound heading for its worst weekly performance against the US dollar in 2024. At the time of writing, sterling was down 0.3% against the dollar at 1.3367, while the euro held steady against the pound at 0.8707.
A Labour Party member of the House of Commons announced his resignation, clearing the way for Mayor Andy Burnham to return to Parliament. This move would qualify him to challenge Prime Minister Starmer for the leadership of the Labour Party. Despite facing numerous challenges, the prospect of Burnham potentially becoming Prime Minister is viewed as a risk by UK bond traders, who fear he could increase public spending, thereby leading to higher issuance of UK government debt. Although Burnham has stated that his comments last year about the UK being "at the mercy of" bond markets were taken out of context, it has still unsettled investors. He has also indicated that defense spending might be an exception.
Jefferies strategist Mohit Kumar noted, "The market is concerned that Burnham could be more left-leaning, and we might see a further increase in the deficit. Our base case is an orderly exit for Starmer, with Burnham likely becoming the next Prime Minister. We maintain our preference for a steepening yield curve and are underweight the pound."
Following Labour's defeat in local elections last week, Starmer is fighting to retain his position as Prime Minister, heightening concerns over his low approval ratings. This presents a risk for bond investors, who perceive Starmer and his Chancellor, Rachel Reeves, as more committed to controlling borrowing than their potential successors.
Burnham's announcement has intensified the political tension. According to a YouGov poll, the Manchester Mayor is the only senior political figure in the UK with a net positive approval rating among voters and is the preferred candidate for the left wing of the Labour Party. While he has not yet released a formal campaign platform, his various comments on fiscal policy over the past year have already drawn market attention.
Analysis suggests that Burnham has proposed more eye-catching tax and spending plans that could expose public finances to greater risk. These include halving the basic rate of income tax and increasing borrowing to fund defense spending. However, it remains unclear how the constraints of the premiership might temper his ambitions.
This political uncertainty comes at a challenging time for UK bond investors. Gilts have been hit hard by the surge in global energy prices due to conflict in the Middle East, which could exacerbate inflationary pressures. Since attacks involving the US and Israel on Iran, benchmark yields have risen by nearly one percentage point, and traders have shifted their expectations for Bank of England policy from rate cuts to potential hikes. A change in government could add another headwind. Since last week's local elections, the pound has been the second-worst performer among G10 currencies.
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