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Fiscal Policy · Gilts · Sterling · UK Politics
UK government bond yields rose 6.9 basis points to 4.813% after Labour's Andy Burnham won a special district election, clearing his path to challenge Prime Minister Keir Starmer, which investors perceive as less market-friendly due to potential increased public spending and higher taxes.
Burnham's victory significantly raises the probability of a leadership contest against Starmer, with Barclays economists Jack Meaning and Cian Hennigan expecting a formal challenge next week. Investors express concern over Burnham's perceived inclination towards higher public spending, especially given the UK's already constrained public finances.
U.K. public sector net borrowing for May reached £23.3 billion ($30.77 billion), 30% more than a year earlier and £5.6 billion higher than the Office for Budget Responsibility's forecast. This fiscal backdrop makes investors demand higher yields on gilts.
RBC Wealth Management states Burnham's policies will result in more government borrowing. Sterling also fell, briefly dropping to an 11-week low of $1.3160.
Richard Carter, head of fixed interest research at Quilter Cheviot, confirms a Burnham government causes further deterioration in public finances. Pantheon Macroeconomics economists Rob Wood and Elliott Jordan-Doak note Burnham faces the same dire public finances as the current administration.
ING foreign exchange strategist Francesco Pesole indicates markets recently received assurance Burnham will not upset the gilt market with his fiscal plans.
