Key Takeaways
- UK government bonds and sterling fell on Friday morning as Manchester mayor Andy Burnham’s path to No. 10 became clearer.
- The potential new prime minister has said the government should not be dictated to by the bond markets.
- Keir Starmer’s “days are numbered,” says one fund manager.
UK bonds and currency markets have endured a turbulent week amid intense speculation around Prime Minister Keir Starmer’s future.
After beginning the week at 4.87%, the yield on 10-year gilts reached 5.14%, the highest since 2008, on Friday morning as markets react to potential leadership challenges from each flank of the Labour party.
Markets had seemed to stabilize on Thursday as gilt yields eased despite the resignation of Health Secretary Wes Streeting, who criticized Starmer’s leadership on his way out of the cabinet. On the right of the Labour party, Streeting is seen as a more market-friendly candidate, though he has stopped short of announcing his own leadership bid.
Manchester mayor Andy Burnham—currently the betting market’s favorite to replace Starmer—announced his intention to return to Westminster on Thursday evening. Burnham needs to win a by-election to be able to challenge Starmer, and current Makerfield MP Josh Simons has said he will step aside to allow the Manchester mayor a path back to Westminster.
UK Gilt Yields Hit Multi-Decade Highs
The 30-year gilt was back up at highs last seen in 1998 at 5.8%. Burnham has previously stated the UK government should not be beholden to the bond markets.
Currency markets have also reacted to political development, with the pound weakening against the dollar to USD 1.33 on Friday after beginning the week at USD 1.36.
“For now, Starmer appears reasonably safe, but the wheels could come off fast should other cabinet members resign, or a tangible alternative to the PM emerge,” says Matthew Ryan, head of market strategy at Ebury.
Ryan expects Starmer to be forced out at some stage in the not too distant future, even if he manages to stave off the current revolt.
“GBP and gilts are unlikely to react favorably given Burnham’s recent remarks that the government should not be beholden to the bond market,” he adds.
The fact that Streeting has so far been unable to trigger a leadership contest buys Starmer time, according to Neil Mehta, macro portfolio manager at RBC BlueBay, though the prime minister’s “days are numbered.”
“The next Labour leader will come from the left side of the Party and against a backdrop of uncertainty, UK financial assets and Sterling seem likely to be subjected to an elevated political risk premium for an extended period.”
