Following Andy Burnham's by-election victory in Makerfield, UK gilt yields have shown some stabilization. The 10-year benchmark gilt yield eased by 2 basis points to 5.15% on Monday, while the 30-year gilt yield also fell 2 basis points to 5.83%. This comes after significant selling pressure last week, which saw 20 and 30-year gilt yields reach their highest levels since 1998, driven by concerns over political uncertainty and potential shifts in fiscal policy. Investors are attempting to assess whether Burnham's potential challenge to Prime Minister Keir Starmer could lead to a less disciplined approach to borrowing and spending.
Burnham, the Mayor of Greater Manchester, has attempted to placate bond markets, walking back previous comments where he appeared to suggest the UK was "in hock to the bond markets." He has pledged commitment to existing fiscal rules, aiming to reassure investors who remain skeptical after the economic instability caused by Liz Truss's mini-budget in 2022. Despite these reassurances, analysts at Deutsche Bank indicated that investors are "likely to fear higher fiscal spending with Burnham as PM."
Despite the recent easing, market skepticism persists, with real 10-year gilt yields flirting with a 2026 high at approximately 1.67%, and the pound remaining near its annual low. Investors are particularly concerned about Burnham's stated support for the state pensions triple lock and the possibility of him altering current fiscal rules, even with advice from Richard Hughes, former head of the Office for Budget Responsibility. However, for now, oil prices are seen as a more significant driver for gilt performance due to their impact on inflation expectations, potentially allowing the Bank of England to keep interest rates steady at 3.75%. The stability of the Iran-U.S. peace deal also poses a risk to bond yields.
Burnham's path to becoming Prime Minister is not straightforward; he first needed to win the Makerfield by-election to return to Parliament. While he secured this win, the timing of any leadership challenge to Starmer is uncertain, and his detailed economic plans are still largely undefined. Analysts note that a Burnham premiership would inherit a fragile fiscal position, limiting room for significant policy changes. The by-election itself was hotly contested, with rival parties, including Nigel Farage's Reform UK, performing strongly, underscoring the political fragmentation.
