UK borrowing costs rise and sterling falls as traders brace for Burnham
UK government borrowing costs have jumped at the start of trading, and the pound has fallen, as City traders respond to the news that Andy Burnham now has a chance to become Labour’s next leader.
UK bond prices have dropped at the start of trading, which pushes up the yield (or interest rate) on these gilts, while the pound has dropped against the US dollar.
Yesterday, Burnham was handed a potential route back to parliament when Josh Simons, MP for Makerfield, announced that he is resigning to free up a seat for Burnham.
Burnham, the Greater Manchester mayor, confirmed he would ask Labour’s ruling national executive committee (NEC) to allow him to stand in the contest. Allies of Starmer confirmed that he would not seek to block him.
Should he win and return to parliament, Burnham appears to be in a strong position to challenge Keir Starmer for the leadership of the Labour Party.
Yesterday, UK bond yields hit their lowest level since Monday after health secretary Wes Streeting failed to launch a leadership challenge as he quit the cabinet.
This morning, the yield on UK 10-year bond is up 11 basis points (0.11 of a percentage point) to 5.11%, suggesting concerns that the UK could aim to borrow more under a new prime minister.
Thirty-year bond yields are up 11 bps too to 5.76% – not far from the 28-year high of 5.81% hit on Tuesday.
Other government bond yields (such as the US and Japan) are rising too this morning, but UK borrowing costs are moving somewhat more sharply.
The pound has hit its lowest level in five weeks, down more than half a cent at one point to $1.333.
Kathleen Brooks, research director at XTB, says:
Plans to topple the Prime Minister have now burst into the open. Wes Streeting resigned from government, but did not announce a leadership challenge directly, as he waits for others to join the race. Andy Burnham is now expected to run in a byelection to pave a long and winding route to number 10, and Angela Raynor is also expected to run in any leadership race. Kier Starmer is also expected to stand. There is no timeline for a contest, so the current prime minister is now a lame duck indefinitely.
The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring. GBP/USD is currently trading at $1.3350, a loss of 1.5% this week. This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect on the pound.
Key events
UK borrowing costs at highest level in years
UK bond yields have now hit new multi-year highs.
The yield, or interest rate, on UK 10-year bonds has now risen to 5.15%, their highest level since 2008 and above the high set earlier this week when pressure was mounting on Starmer after last week’s local elections.
Thirty-year bond yields also rose, hitting 5.813%, slightly above the 28-year high hit on Tuesday.
UK public more worried about cost of living crisis
Concerns about the UK’s cost of living crisis have jumped last month, as the Iran was pushes up energy prices.
Nearly 4 in 5 (79%) adults surveyed in April reported that their cost of living had increased compared with one month ago. This is an increase from 67% in March, and 56% in February.
The most commonly reported reason was the price of food shopping (cited by 92% of people), followed by the price of fuel (80%), and gas or electricity bills (60%)
Overall, 90% of people cited the cost of living as a concern; this jumped to 96% among younger adults aged 16 to 29 years.
This underlines why there has been such pressure on Keir Starmer’s leadership, and criticism that the government hasn’t done more to help struggling households.
The proportion of adults reporting international conflict as an important issue rose to 63%, the highest since the ONS started asking this question in October 2022.
Pound heads for its worst week since November 2024
The pound is heading for its worst week against the US dollar in eighteen months, after days of mounting pressure on prime minister Keir Starmer.
Sterling has dropped by around three cents so far this week – from $1.363 last Friday to $1.333 this morning, a five-week low.
That fall of 2.2% would be the biggest drop since 7-11 November 2024, when it fell by 2.35% against the dollar (which rallied when Donald Trump won the US presidential election).
Today, the pound is down two-thirds of a cent, as Andy Burnham prepares a run for parliament in the Makerfield constituency.
Political developments have overshadowed the markets this week, reports Mark Dowding of RBC BlueBay Asset Management.
Dowding says it looks “inevitable” that Starmer’s days are numbered, after the slew of ministerial resignations citing a loss of confidence in the PM.
He adds:
Against this backdrop UK financial assets and sterling seem likely to be subjected to an elevated political risk premium for an extended period.
As a result, we have added to short positions in the pound and see the outlook for sterling as very asymmetric, given that we struggle to see the currency rallying against a weak economic environment.
There is an argument that changing prime minister won’t lead to a major change in the UK’s fiscal stance, as Downing Street would still face the same constraints.
Lombard Odier’s Bill Papadakis, senior macro strategist, suggests memories of Liz Truss’s short tenure, after unsettling the market with large unfunded tax cuts, could curb the spending enthusiasm of any new leader.
Papadakis also explains:
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UK Prime Minister Keir Starmer is under pressure. His chances of staying in office look extremely narrow
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A change of Prime Minister would not necessarily mean a large shift in fiscal stance. A new leader would operate under the same constraints; a significant increase in borrowing to fund additional spending is therefore not our base case
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Political instability is not the dominant driver of higher Gilt yields, which have been rising since the start of the Middle East conflict, as higher energy prices put a stop to Bank of England’s easing cycle
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A gradual reopening of oil flows through the Strait of Hormuz – our base scenario – would bring UK economic fundamentals and potential rate cuts back into focus, supporting our medium-term constructive view on Gilts.
The financial markets are pricing in uncertainty and a likely leftwards shift in the UK, argues Neil Wilson, Saxo UK investor strategist.
There is a non-negligible chance that the market could overdo the risks from a Burnham leadership – a lot would depend on his choice of Chancellor. The situation remains very complex, however if we try to boil into simple terms for investors, the UK is in a very difficult position economically, fiscally and politically with no one seemingly able to come up with a credible plan to fix the nation’s finances and secure growth.
Inflation and yields are resetting at a higher level for the UK, which is not a good look for the currency.
Andy Burnham’s view on the bond market may also be pushing yields up today, suggests AJ Bell investment director Russ Mould:
“The decision of a Labour MP to stand down and pave the way for Andy Burnham to return to parliament – likely as a precursor to a leadership challenge – has seen gilt yields move yet higher.
“While there’s no guarantee Burnham would win a by-election or contest to be prime minister, the fact he is on record as saying Britain must stop being ‘in hock to bond markets’ has helped push UK borrowing costs higher and seen the pound slump.
“A process involving Burnham also promises to be more protracted and ‘noisy’, thereby prolonging and exacerbating the uncertainty about the political situation in the UK.
Goverment bonds are also being hit by a jump in the oil price.
Brent crude is up 2.2% this morning at over $108 a barrel, after Donald Trump said his patience with Iran was running out, during his visit to Beijing.
Higher oil prices will push inflation higher, making it harder for central banks to cut interest rates to stimulate growth.
Jim Reid, market strategist at Deutsche Bank, told clients this morning:
Markets have lost momentum after President Trump said the US doesn’t need the Strait of Hormuz open “at all”. So that’s added to fears that the Strait will remain blocked for some time, leading to a more protracted energy shock for the global economy.
Jump in yields is ‘grim news’ for UK
On the jump in UK borrowing costs this morning, Chris Beauchamp, chief market analyst at investing and trading platform IG, says:
“Andy Burnham’s long quest to find someone to make space for him in Parliament has finally succeeded, but the prospect of the ‘King in the North’s return has not been good for UK borrowing costs.
Worries about higher spending commitments have seen investors take flight from UK bonds. For a UK economy already facing a potential energy crisis, sapping growth, the rise in yields is particularly grim news.”
The Merseyside MP Paula Barker, an ally of Andy Burnham, suggested earlier this week financial markets would “have to fall into line” should the Greater Manchester mayor find a route to Downing Street.
Today, though, the markets are marching to their own tune, lifting borrowing costs…
Shorter-dated UK government bond yields have also risen this morning.
The yield on two-year is up 8 basis points (0.08 of a percentage point) at 4.5%, while five-year bond yields are up 8.5bps to 4.64%.
UK borrowing costs rise and sterling falls as traders brace for Burnham
UK government borrowing costs have jumped at the start of trading, and the pound has fallen, as City traders respond to the news that Andy Burnham now has a chance to become Labour’s next leader.
UK bond prices have dropped at the start of trading, which pushes up the yield (or interest rate) on these gilts, while the pound has dropped against the US dollar.
Yesterday, Burnham was handed a potential route back to parliament when Josh Simons, MP for Makerfield, announced that he is resigning to free up a seat for Burnham.
Burnham, the Greater Manchester mayor, confirmed he would ask Labour’s ruling national executive committee (NEC) to allow him to stand in the contest. Allies of Starmer confirmed that he would not seek to block him.
Should he win and return to parliament, Burnham appears to be in a strong position to challenge Keir Starmer for the leadership of the Labour Party.
Yesterday, UK bond yields hit their lowest level since Monday after health secretary Wes Streeting failed to launch a leadership challenge as he quit the cabinet.
This morning, the yield on UK 10-year bond is up 11 basis points (0.11 of a percentage point) to 5.11%, suggesting concerns that the UK could aim to borrow more under a new prime minister.
Thirty-year bond yields are up 11 bps too to 5.76% – not far from the 28-year high of 5.81% hit on Tuesday.
Other government bond yields (such as the US and Japan) are rising too this morning, but UK borrowing costs are moving somewhat more sharply.
The pound has hit its lowest level in five weeks, down more than half a cent at one point to $1.333.
Kathleen Brooks, research director at XTB, says:
Plans to topple the Prime Minister have now burst into the open. Wes Streeting resigned from government, but did not announce a leadership challenge directly, as he waits for others to join the race. Andy Burnham is now expected to run in a byelection to pave a long and winding route to number 10, and Angela Raynor is also expected to run in any leadership race. Kier Starmer is also expected to stand. There is no timeline for a contest, so the current prime minister is now a lame duck indefinitely.
The pound is weakening this morning after a sharp drop on Thursday, when Andy Burnham threw his hat into the ring. GBP/USD is currently trading at $1.3350, a loss of 1.5% this week. This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect on the pound.
