Mayor of Greater Manchester Andy Burnham.
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UK yields rose sharply on Monday after coming under selling pressure last week, as traders assessed whether a challenge to Prime Minister Keir Starmer’s leadership threatened the country’s stability.
As bond markets opened Monday morning, the yield on the 10-year bond, or gilt, stood at 5.15%, down 2 basis points. Last Friday, the 20- and 30-year yields rose to their highest levels since 1998. On Monday, the interest rate on the 30-year gilt remained higher, but also fell 2 basis points to 5.83%.
UK borrowing costs have been under pressure as the national election saw the ruling Labor Party do poorly, prompting calls for Starmer to step down.
Political unrest in the UK has helped drive borrowing costs higher.
Starmer has so far refused to resign, but now faces potential leadership challenges from several of his Labor colleagues, including former Health Secretary Wes Streeting, his former deputy Angela Rayner and Greater Manchester Mayor Andy Burnham.
Uncertainty in British politics has put bond markets on edge as investors look to see if the new Prime Minister will loosen self-imposed fiscal rules that limit spending and spending.
Burnham, who is considered to be on the left of his party, was looking to reassure investors over the weekend that the UK government’s monetary policies would be in safe hands if he were to become PM, backtracking on earlier comments in which he appeared to suggest the country was “vulnerable to bond markets.”
“I never said you can ignore the bond markets,” Burnham told ITV News at the weekend.
“I said politicians have put Britain in trouble because of the way we have lost control of our finances and public spending when we cut power, water, housing,” he added.
Lizzie Galbraith, senior economist at Aberdeen, told CNBC on Monday that “more risk” has been placed on UK gilts.
“One of the things is the uncertainty of it all. We don’t have a leadership race going on yet… [but] “We’re probably looking at months here of policy debate, policy uncertainty, and markets trying to predict where the Labor Party might move if we get that eventual leadership challenge, as it may seem to be the intention of the senior people in the party at this stage,” he told CNBC’s “Europe Early Edition.”
What’s next?
The road for Burnham to replace Starmer is not a smooth one.
First, he must be a member of parliament to be able to challenge the leadership. Although he has been given the green light to contest the by-election in Makerfield, northern England, he is not guaranteed to win, with rival parties lining up to contest the election.
Analysts at Deutsche Bank said on Monday that, despite Burnham backing away from his comments on the bond market, investors “may fear higher spending with Burnham as Prime Minister.”
“So now the focus is on that by-election, which the BBC reported will be held on June 18. There is no guarantee that he will win the by-election, as it is a small seat for Labor and Nigel Farage’s Reform UK did a lot there in the local elections earlier this month. A lot will depend on how aggressively the Green Party competes with the email that has been analyzed to comment and divide abusers.
The debate about Brexit, the departure of the UK from the European Union, is likely to resurface in the Leave-vote constituency Makerfield, while Reform UK may focus on Burnham’s previous support for staying in the bloc before the 2016 referendum.
Carsten Nickel, managing director at Teneo, told CNBC that markets should prepare to see Brexit again used for “short-term politics” instead of pointing to long-term policy direction.
“It’s the only thing that interests me [to hear] at this stage it will be a long-term debate about what to do [they] Do you want to lead as a Team Worker? Like some consensus going on at the center, but that’s not there.”
