* Sterling nears three-month lows, speculation on Starmer
departure builds
* Options markets show higher demand for pound volatility
hedges
* UK 10-year gilt yields hover around 4.85%, not far from
2008 peaks
(Adds comment, updates prices)
LONDON, June 22 (Reuters) – The pound eased on Monday as
speculation mounted that Prime Minister Keir Starmer could set
out a timetable for his departure imminently, paving the way for
rival MP Andy Burnham to become Britain’s seventh leader since
the Brexit vote a decade ago.
Sterling, which has lost some 3% since pressure on
Starmer began to heat up in February, was down 0.3% at $1.319,
near its lowest in three months.
Britain already has the highest borrowing costs in the Group
of Seven wealthy nations due to its high debt and interest
payments, years of anaemic economic growth, its struggles to cut
spending and the need to invest in areas like defence.
The threat to Starmer, whose popularity among voters has
nose-dived over his handling of the economy, ramped up on Friday
when Burnham, the former Greater Manchester mayor, decisively
won a parliamentary election to return to Westminster.
The options market shows traders are willing to pay more to
hedge against volatility in the pound in the coming weeks than
they were on Friday .
Key for investors is the UK gilt market, where yields at
around 4.85% are not far off their highest since the
2008 financial crisis, meaning Britain must pay more for its
medium-term borrowing needs than any other developed nation.
“The question is, is it going to be a coronation or a
contest? If it’s a coronation, then I think we can see a little
bit of a rally in gilts and/or sterling holding on,” CIBC head
of G10 currency strategy Jeremy Stretch said of Starmer’s
potential successor.
“But if there’s a contest, then the danger would be that
could involve various protagonists involving themselves, or
being dragged into fiscal commitments that they would not
otherwise have made, or not be comfortable with. So that would
be much more problematic from a sterling perspective.”
Repeated political crises and concern over Britain’s
stretched finances have made investors wary of the pound and of
gilts, which are prone to far higher volatility than many other
government bonds.
Burnham is viewed as being more left-leaning than Starmer,
and although he has said he will stick to incumbent finance
minister Rachel Reeves’ tight fiscal rules, investors will need
to see proof.
“Burnham has said that he would respect fiscal rules.
However, it is not obvious where the money for any additional
spending will come from,” Jefferies strategist Mohit Kumar said.
“Taxes have reached a stage where further rise(s)… would
be counterproductive. Efficiency savings look good on paper, but
never realistically work.”
“We have stayed away from the long end of the gilts curve,
have steepeners in our portfolio and have been underweight
sterling,” he said, referring to a position that assumes
shorter-dated bonds will perform better than longer-dated ones,
given the concern about Britain’s long-term finances.
“We are maintaining our view and expect further volatility
in the UK long end over the coming days.”
