The next potential Prime Minister of the United Kingdom must not only answer to voters, parliament, and other world leaders, but also seek the approval of another powerful force: the bond market.
Andy Burnham, the charismatic former Mayor of Greater Manchester and a Labour Party figure, has previously voiced strong opposition to government policy being dictated by the investors who hold the nation's massive debt. In an interview last September, he expressed a desire for the UK to break free from being "held hostage by the bond market."
This view reflects a growing perception that the real power over tax and spending decisions at Downing Street lies not with elected officials, but with bond investors. When investors deem government policies too expensive, they punish the government by selling its bonds, as the risk of holding that debt increases significantly. Such selling pushes up bond yields—the interest rate the government must pay to new investors—which in turn raises borrowing costs across the economy, including for homeowners with mortgages.
Now, at a critical juncture in the leadership contest and facing the practical constraints of governance, Burnham has softened his stance. In an interview last month, he expressed support for the current Labour government's fiscal rules, which aim to reduce public debt.
"I have never said you can ignore the bond market," Burnham told the broadcaster.
While calling for the government to be less constrained by bond investors may resonate with the public, analysts argue it is not a realistic proposition.
"If you have 3 trillion pounds of debt, you are, to some extent, hostage to your creditors," said Jonas Goltermann, Chief Markets Economist at Capital Economics, during an analyst call on Monday.
"It's one thing to say that when you're mayor of Manchester and running for party leader. It's another thing when you're about to become prime minister and everything you say is scrutinized," Goltermann added in an interview. "I think he and his team have realized that, which is why he's rowed back. In reality, it's the bond market, not fiscal rules, that is the main constraint on government spending."
The UK remembers the policy disaster of 2022 vividly: then-Prime Minister Liz Truss's announcement of major unfunded tax cuts triggered a massive sell-off of UK government bonds. The resulting financial market turmoil forced a humiliating and rapid policy U-turn, leading to Truss's resignation after just 49 days in office.
In 2024, Keir Starmer led the Labour Party to victory and immediately committed to strict, self-imposed limits on spending and borrowing. Combined with piecemeal tax increases, this fiscal framework leaves little room for major new public policies.
"Bond investors have far more power than people realize," said Dan Coatsworth, Investment Director at platform AJ Bell. "When bond yields spike, the government at the center of the storm is often forced to change policy quickly, either by scaling back its plans or pausing them until market sentiment calms."
The UK's Massive Debt Burden
Like many major economies, the UK carries a huge debt load, amounting to £2.98 trillion (approximately $4 trillion). This massive debt stems from a series of major crises: the 2008 global financial crisis, the COVID-19 pandemic, and the energy shock following Russia's full-scale invasion of Ukraine.
UK debt stands at about 95% of its GDP, lower than France's 116% and the United States' 100%. However, the interest rate the UK pays on its 10-year government bonds is higher than that of comparable French and US bonds.
Last financial year, the UK's debt interest payments reached £110 billion (approximately $145 billion), exceeding the government's defense budget for the same period.
The UK's borrowing costs have surged this year. In March, the yield on 10-year bonds breached 4.9%, a high not seen since 2008. This rise was part of a global trend, driven by heightened inflation uncertainty and rising global energy prices due to conflicts.
(Rising inflation pressures central banks to raise interest rates, which pushes up government bond yields. Investors often sell existing bonds to wait for new bonds issued at these higher yields.)
Andrew Goodwin, Chief UK Economist at Oxford Economics, believes the rise in UK borrowing costs is primarily due to geopolitical tensions affecting energy, rather than current domestic political turmoil. The UK is highly dependent on gas imports, and gas prices directly determine electricity costs, making the economy more vulnerable to global energy shocks than others.
Should Burnham become Prime Minister, UK political developments could become a key risk factor for the bond market to worry about.
Burnham has proposed plans to bring core public services like water, housing, and energy under stronger state control. Nationalizing the water industry alone is estimated by the UK's Department for Environment, Food & Rural Affairs to cost £100 billion (approximately $132 billion).
How such ambitious reform plans will be balanced with his pledged fiscal discipline remains unclear. Analysts say investors will be watching closely to see who Burnham nominates to replace Rachel Reeves as Chancellor of the Exchequer, a change widely anticipated in the market.
Goltermann noted that the feedback loop between UK politics and the bond market will be much more significant for a Burnham government than it was during the past decade of low UK bond yields.
"Since the Truss crisis of 2022, the UK gilt market has become hypersensitive to selling off on political bad news," he said.
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