UK Bonds Fall as Burnham Win, Oil Prices Renew Fiscal Concerns

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(Bloomberg) — The UK’s government bonds fell on Friday as higher oil prices renewed concerns over inflation and a win by Andy Burnham in a special election increased the country’s political uncertainty.

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Yields on 10-year gilts rose five basis points to 4.81%, underperforming European peers. Global bonds took a hit with Brent crude climbing back above $80 a barrel as the US and Iran postponed the start of negotiations over a permanent peace deal.

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Longer-term UK yields, already inflated by the war in Iran, hit the highest since 1998 last month after Burnham said he intended to run for Parliament. His win in Makerfield in northern England enables him to challenge Prime Minister Keir Starmer for the country’s leadership.

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The win “had largely been factored into market pricing ahead of the event,” said Kallum Pickering, chief economist at Peel Hunt, adding that Burnham will likely be sworn in on Monday as Parliament is not sitting on Friday. “Today and over the weekend, we may be left only to speculate about how any challenge could unfold.”

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“Risks are skewed to the downside for financial markets. A shift to a more left-wing agenda without a fresh electoral mandate could trigger negative reactions in gilt and currency markets,” he said.

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For the bond market, the key question is the impact on the country’s finances if Burnham becomes prime minister. So far, he has offered little clarity on the potential policies he’d pursue, making it difficult to gauge the ramifications for future borrowing.

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He has previously criticized the government’s economic approach, claiming the country is “in hock” to the bond market — remarks that caused a market selloff. However, since the Manchester mayor stepped forward to contest the parliamentary seat in Makerfield, he has attempted to draw a line under those comments.

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Gilt investors are nervous about any potential to ramp up bond sales to fund spending, given the UK is already struggling with its debt pile. According to the Organisation for Economic Cooperation and Development, national debt is projected to increase to 105.4% of GDP by 2027, up from 98.8% in 2023 — the year before Starmer’s Labour government came to power.

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The UK’s borrowing costs have already surged since the start of the war in the Middle East, with the inflationary impact of higher energy prices flipping market expectations on Bank of England interest rates from likely cuts to potential hikes.

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While Starmer and his Chancellor of the Exchequer Rachel Reeves have placated bond investors by adhering closely to self-imposed fiscal rules, any misstep by new leadership could spark a renewed selloff. Unfunded tax cut plans from former Prime Minister Liz Truss in 2022 led to a historic rout and her ouster.

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