Prime Minister Keir Starmer's resignation has created uncertainty in UK markets, leading bond traders to scrutinize who his likely successor, Andy Burnham, will appoint as the next finance minister. The primary concern revolves around whether the new Chancellor will maintain current fiscal rules, which have been championed by outgoing Finance Minister Rachel Reeves to reassure bondholders about the UK's financial stability. Investors are particularly wary given Britain already faces the highest borrowing costs among G7 nations due to high debt, interest payments, and sluggish economic growth. The 10-year gilt yields are currently around 4.85%, near their highest since the 2008 financial crisis.
Andy Burnham, viewed as more left-leaning than Starmer, has stated his intention to adhere to existing fiscal rules. However, analysts remain skeptical, with Nomura economist George Buckley emphasizing that the "most important question relates to Mr. Burnham's approach to fiscal policy, his pick of Chancellor and whether he will stick to the fiscal rules." Jefferies strategist Mohit Kumar noted that while Burnham's commitment is acknowledged, the source of funding for any additional spending is unclear, and further tax increases could be counterproductive. Kumar's firm has maintained an underweight position on sterling and is wary of the long end of the gilts curve.
While the pound initially saw a muted reaction to Starmer's resignation, down 0.2% at $1.3202 against the dollar, and gilt prices remained relatively steady with yields up 1 basis point at 4.85%, volatility is expected. The options market indicates traders are willing to pay more to hedge against short-term pound volatility. The choice of finance minister is crucial for market sentiment. Foreign Secretary Yvette Cooper has been identified as a "market reassurance pick" by some bond traders due to her centrist approach and previous experience as chief secretary to the Treasury, contrasting with concerns that a more left-leaning appointment, such as Energy Secretary Ed Miliband, could lead to a sell-off in UK government debt and increased borrowing costs.
