- Andy Burnham cruised to victory in the Makerfield by-election and returned to Parliament as an MP
- Gilt markets have been relatively calm in the wake of the by-election result
- Higher yields partly down to Middle East setback rather than purely UK politics
- Still potential for gilt yields to keep rising if Starmer doesn’t go quietly
- An early general election could also spook bond markets
Dan Coatsworth, head of markets at AJ Bell, comments:
“Andy Burnham’s by-election victory hasn’t fazed bond markets, but this might simply be the calm before the storm.
“Keir Starmer has so far indicated he won’t step down, which means there could be a leadership challenge and that could cause unease on the markets. Investors hate uncertainty and politics has a habit of making their heads spin.
How has the market reacted today?
“Burnham has already rowed back on some ideas in recent weeks, which hints that he might not lead in such a different way to the status quo should he become prime minister. He has committed to the current fiscal rules and appears to have backed down from earlier suggestions that he didn’t want to be told what to do by the bond markets.
“That might explain the muted reaction to the by-election result. Even though the 10-year gilt yield nudged up a fraction to 4.82%, it is below the 5%-plus levels seen in May when Labour suffered major setbacks in local elections.
“The 30-year gilt yield is a better measure of political sentiment as the government typically issues long-term debt. Yields for 30-year UK government bonds followed the same pattern as the 10-year, moving up a small amount to 5.52% yet trading nowhere near May’s levels.
“Friday’s moves reflect the risk that Starmer won’t go quietly. But they also reflect the setback with the US-Iran peace deal which has caused oil prices to rise again today, and inflation fears to remain on the table, thus having a direct read-across to interest rates and bond yields.
“Over the coming days, the bond market will look for clues on Burnham’s chances for getting the top job, and how he might steer Labour in a different direction. He might not have wanted to rock the boat ahead of the by-election for fear of causing upset or ruining his chances. Now he’s in a stronger position to lay out policy changes and not simply tow the party line.
All eyes on the next chancellor
“Burnham’s choice of chancellor if he becomes prime minister could have a major impact on bond markets.
“Bond investors like boring and dull – they want someone who has a plan where the maths stacks up and they stick to it. Former transport secretary Louise Haigh is seen as one of Burnham’s closest allies, but a fraud conviction could stop her from being the country’s numbers person. Ed Miliband is also being touted as a potential candidate for chancellor and would bring considerable experience from prior senior political roles.
Reform’s political challenge hasn’t gone away
“Earlier this month, Burnham indicated he would not call an early general election if he becomes UK prime minister. However, you can never say never when it comes to politics. Burnham, if he becomes leader, might come under pressure to prove that he’s the person the nation wants to run the country. The scale of his win in the Makerfield by-election was solid, but just one result. Reform continues to bite at Labour’s heels and so a general election win for the incumbent party under Burnham would not be a shoe-in.
“Should an early general election be called and were Labour to lose power to Reform, then bond markets could have a much bigger issue on their hands. A Reform government would almost certainly make investors demand a higher reward for the risk of backing the UK, as Reform’s policies are currently thin on detail. In that situation, expect higher bond yields, a more volatile pound, and concerns that any unfunded tax cuts will put even more pressure on government borrowing.”