A potential pathway for Manchester Mayor Andy Burnham to challenge Keir Starmer for the UK premiership has triggered a sharp sell-off in UK government bonds and the pound. Investors are concerned this could lead to renewed political instability and looser fiscal policies. Amid broader 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 stand for parliament—a prerequisite for challenging Starmer—contributed to the pound's slide against the US dollar, putting it on track for its worst weekly performance 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 MP in the House of Commons announced his resignation, creating a vacancy that would allow Manchester Mayor Andy Burnham to return to parliament. This move would grant him the eligibility 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. They fear he would increase public spending, leading to a rise in gilt issuance. Although Burnham has stated that his comments last year about the UK being "hostage" to bond markets were taken out of context, they have nonetheless alarmed investors. He has also indicated that defense spending might be an exception to fiscal restraint.
Jefferies strategist Mohit Kumar noted, "The market is worried that Burnham would be more left-leaning, and we could see a further increase in the deficit. Our base case is for an orderly exit by Starmer, with Burnham likely becoming the next Prime Minister. We maintain our preference for a steeper yield curve and are underweight sterling."
Following Labour's defeat in last week's local elections, 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 Labour left. 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 Burnham has proposed more eye-catching tax and spending policies that could pose greater risks to public finances. 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 would temper his ambitions.
This political uncertainty comes at a challenging time for UK bond investors. Gilts have been hit hard by soaring global energy prices due to the war in the Middle East, which could exacerbate inflationary pressures. Since the US and Israeli strikes 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 hikes.
A change in government could become another headwind. Since last week's local elections, the pound has been the second-worst performer among G10 currencies.
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