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UK borrowing costs hit their highest level since 2008 on Friday and the pound sank as traders priced in a greater likelihood that Andy Burnham would challenge Sir Keir Starmer for the Labour leadership.
The 10-year bond yield rose 0.15 percentage points to 5.14 per cent, as the price of the debt fell, taking the UK’s benchmark borrowing costs slightly above a post-2008 high set earlier this week.
A potential path to Downing Street opened up for Burnham on Thursday, when Labour MP Josh Simons said he would resign his seat and trigger a by-election in Makerfield, near Manchester.
The pound dropped 0.5 per cent against the dollar to $1.333, hitting a one-month low, after a 0.9 per cent fall on Thursday.
Burnham’s potential candidacy has been a lightning rod for investor concerns that a change in Labour leadership to either the Greater Manchester mayor or a figure such as former deputy prime minister Angela Rayner could lead to a loosening of the UK’s self-imposed borrowing limits.
“As an investor, my strategy is already [to be] short UK bonds and very short the pound,” said Adrian Owens, CIO for global rates strategy at hedge fund group Investcorp-Tages. “On a Rayner or Burnham victory, we will be adding to both.”
Thirty-year gilt yields, which have been more sensitive to longer-term borrowing worries alongside inflation, rose 0.15 percentage points to 5.8 per cent, underperforming other European bond markets and within touching distance of a post-1998 high hit on Tuesday.
Other European government bonds also weakened amid a rise in oil prices. But analysts said concerns around Burnham’s potential premiership were hitting UK assets.
“The ‘Burnham premium’ is heavily weighing on both gilt yields and sterling,” said Pooja Kumra, rates strategist at TD Securities, adding that “the path has been set for his return sooner than markets had anticipated”.
Kumra said Labour’s National Executive Committee was expected to provide details on the by-election “as soon as next week”, which “could keep the bear momentum in place”.
“[The] market’s fear is that Burnham would be more left-leaning, and we could see further increase in deficits,” said Mohit Kumar of Jefferies, who added that the bank was expecting this to weigh on sterling and longer-term UK government bonds.
The news that Burnham plans to return to parliament through a by-election, opening the path to a possible leadership challenge against Starmer, has pushed sterling lower.
“Recent history suggests the pound is more vulnerable to the prospect of Burnham compared to other candidates, due to his fiscal views,” said Francesco Pesole, FX strategist at ING.
Investors already worried about fiscal strains from the Middle East war fear a left-leaning leader such as Burnham could make the situation worse.
Derek Halpenny, head of global markets research at MUFG, said that “if Burnham is favoured [by the party] then this saga is set to run for longer”, given his need to secure a parliamentary seat. “This will not be a favourable backdrop for the gilt market or the pound.”
Burnham, who would need to be an MP to challenge Starmer, said he planned to stand in the Makerfield seat to bring “the change we have brought to Greater Manchester to the whole of the UK”.
Starmer, who indicated he would not try to block Burnham from standing in the by-election, has warned that a leadership election would lead to “chaos” and damaging business uncertainty.
Additional reporting by Emily Herbert
