LONDON, ENGLAND – JULY 9: British Prime Minister Sir Keir Starmer hosts the first roundtable of regional English mayors with Andy Burnham (R) Mayor of Greater Manchester, at Downing Street on July 9, 2024 in London, England. Sir Keir Starmer hosted the first roundtable with metro mayors from 11 regions across England. (Photo by Ian Vogler – WPA Pool/Getty Images)
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LONDON — U.K. gilts and sterling have come under increasing pressure, amid fears a new left-leaning prime minister will challenge the country’s fiscal discipline and take up a confrontational stance towards bond markets.
Investors on Friday were reacting as hurdles were cleared for a challenge to Keir Starmer’s premiership from Labour Party rival Andy Burnham, with selling pressure intensifying.
It came as U.S. President Donald Trump told reporters it will be “tough” for Starmer to survive politically without dealing with the key issues of immigration and energy policy.
Burnham — who is currently the Mayor of Greater Manchester, but not a sitting lawmaker in the U.K. parliament — was offered a fresh pathway to the House of Commons on Friday, which could turbo-charge his route towards 10 Downing Street.
He is set to run in the forthcoming by-election in Makerfield, north-west England, after its MP Josh Simons agreed to step aside and allow Burnham — dubbed Labour’s “King in the North” — to contest the election.
An earlier bid by Burnham to contest a by-election back in January was blocked by Starmer loyalists in an attempt to head off a challenge.
Now, with Starmer under intense pressure to resign after the ruling Labour Party’s disastrous showing in last week’s local council elections, a victory for Burnham in the forthcoming poll over the ascendant right-wing Reform party could strengthen his push for the premiership.
Leftward shift
The looming prospect of Burnham-led Britain is now rattling investors.
The Manchester mayor last year blasted the U.K. government for “being in hock to the bond markets.”
Traders also fear a more left-wing policy program that would break with the current government’s commitment to fiscal restraint, including £40 billion in additional borrowing for housing and infrastructure spending and higher taxes on expensive homes in London and the south-east of England.
GBP/USD.
The British pound slumped to a one-month low against the dollar on Friday, continuing its sustained slide over the past week as talk of a challenge to Starmer has gathered momentum. Sterling was last seen down 0.3% against the greenback in morning dealmaking, trading at $1.3363.
Meanwhile, the yield on 10-year Gilts — the benchmark for U.K. government debt — remains well above 5%, rising more than 1 basis point on Friday to reach 5.137%.
Elias Haddad, global head of markets strategy, foreign exchange at BBH, said a Burnham-led Labour government will likely lead to more spending and borrowing.
“Political uncertainty will continue to dominate the price action in GBP and gilts, with the bias skewed to the downside given worsening U.K. fiscal credibility,” Haddad said in a note Friday. “U.K. nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult.”
Haddad pointed to recent polling suggesting 61% of Labour party members would support Burnham, versus 28% who would back Starmer.
Prediction betting market Polymarket also puts Burnham at by far the most likely next British prime minister, at 42% compared to just 27% for Starmer keeping his job and a 12% chance of his former deputy Angela Rayner taking charge.
Political ‘psychodrama’
Deutsche Bank analysts noted how Burnham partially rowed back some of last year’s comments on the bond markets, highlighting his comment in February that they should not be ignored.
However, Neil Mehta, macro portfolio manager at RBC BlueBay, believes the Labour government is on course for a decisive shift leftward, which will impact markets and assets.
U.K. 10-Year Gilts.
“The next Labour leader will come from the left side of the party and against a backdrop of uncertainty, U.K. financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period,” Mehta said.
Meanwhile, Peter Ricketts, a member of the House of Lords and former diplomat, suggested that a fresh round of what he called “Westminster psychodrama” will damage the U.K.’s reputation and influence internationally.
“Keir Starmer will be less effective as a leader in Europe on handing the Ukraine and Iran crises if he is fighting for his job at home,” Ricketts said. “The EU will be less interested in negotiating a much closer relationship with UK if they don’t know who will be prime minister in a few months.”
