(Bloomberg) — The UK’s government bonds fell after Andy Burnham’s victory in a special election renewed political uncertainty, prompting investors to demand a higher premium to hold the country’s debt.
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While the decline came during a broader global bond selloff on Friday, gilts remain particularly vulnerable to swings until there is greater clarity over the UK’s political direction and fiscal policy. Investors are now in a period of limbo as they wait to see how a likely challenge by Burnham against Prime Minister Keir Starmer will pan out.
“We will see more volatility in gilt yields as we move forward,” said David Zahn, head of European fixed income at Franklin Templeton, on Bloomberg TV. “Markets hate uncertainty so just not knowing what’s happening will be difficult.”
Yields on 10-year gilts rose nine basis points to a one-week high at 4.84%, underperforming European peers. Global bonds took a hit as the US and Iran postponed the start of negotiations over a permanent peace deal.
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 Starmer, who responded by saying he will stand in any leadership contest — increasing the prospect of a drawn-out bout of political instability this summer.
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.”
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. At a victory rally on Friday, Burnham said the election message was that life needed to be made more affordable.
“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,” added Peel Hunt’s Pickering.