Bond markets will have to fall in line with an Andy Burnham premiership even if the Manchester mayor pursues a considerably more left-leaning economic platform, a Labour MP has claimed.
Paula Barker's remarks on Burnham and markets
Paula Barker, the Labour member for Liverpool Wavertree, hailed Burnham as a “fantastic politician” who is the only person likely to beat Keir Starmer in a leadership election, during an interview with Times Radio. But asked whether markets might give short shrift to a more fiscally loose economic agenda, Barker said: “The markets will have to fall into line,” adding that investors would view the UK as “the best place to be” if the government unveiled “progressive policies that do speak to our communities”.
Market reaction and gilt yields
The remarks come despite gilts selling off sharply so far this week amid the intense speculation surrounding Keir Starmer’s leadership and Britain’s outsized exposure to the conflict in the Middle East. The yield on the UK’s long-dated government bonds, which are more reflective of a country’s long-term fiscal and economic health than shorter coupons, have climbed dramatically since the local election plunged the Prime Minister’s premiership into jeopardy. The interest rate applied to 10-year gilts has climbed more than 20 basis points – or a fifth of a per cent – since the Labour party suffered one of its worst performances at the ballot box in its 125-year history. On Tuesday afternoon, the 10-year gilt yield was 5.1 per cent, stubbornly above the totemic five per cent milestone associated with major disruption in the bond market. The 30-year gilt, which the government has all but stopped issuing, was trading at close to a 28-year high struck earlier that morning.
Warnings of a volatile summer
The rout has led to a wave of warnings from market participants that any sudden change in the government’s self-imposed fiscal rules risked setting off the kind of acute market turmoil unleashed by Liz Truss’s mini-Budget in 2022. “Looking ahead, a leadership race between the left and ‘right’ of the Labour party could make for a volatile summer for UK gilts and the pound,” said Kathleen Brooks, research director at XTB. “Already, the UK’s 10-year gilt yield is at its highest level since 2008, well above the peak reached when Liz Truss was premier. The risk is that this Labour government takes the UK to another level of fiscal stress that is worse than 2022.” Truss’s fateful package of tens of billions of pounds in unfunded spending pledges – accompanied by a coterie of unexpected tax cuts – led to a run on the gilts that forced the Bank of England to intervene in the bond market.
Potential impact of Burnham or Rayner as leader
Ruth Gregory, deputy chief economist at Capital Economics, said that of the frontrunners to replace Starmer, Burnham and his soft-left ally Angela Rayner presented the largest threat to UK bond prices. “And there will be limited room for missteps for whoever takes over. The UK’s already fragile fiscal position means that investors will be on edge for any signs of fiscal loosening,” she said. “A more negative market reaction is likely if Burnham or Rayner are Starmer’s replacement, given they are probably perceived by investors to be more inclined to increase borrowing than Streeting.”
