Andy Burnham, seen as a potential successor to UK Prime Minister Keir Starmer, has started to alleviate concerns in the bond markets. After securing a significant by-election victory, earlier fears stemmed from his past comments about not being "in hock to the bond market" which had contributed to a rise in real 10-year gilt yields and a weakening pound, reminiscent of the Truss mini-budget crisis. However, Burnham has since committed to the current fiscal rules, which require day-to-day spending to be matched by tax revenues and a reduction in net financial debt as a share of the economy. This commitment has been welcomed by analysts, with Barclays noting no intention from Burnham to "game the rules or increase borrowing."
Despite Burnham's reassurances, the bond market remains hesitant, adopting a "show me first" attitude. Real 10-year gilt yields were flirting with a 2026 high at around 1.67%, and the pound was near its yearly low against the dollar. The memory of Liz Truss's mini-budget in 2022 continues to haunt investors, making them wary of any perceived fiscal expansion. Investors are particularly cautious about long-end gilts, demanding higher compensation for fiscal risk. Lale Akoner, a global market strategist at eToro, suggests that yields will not significantly move until markets "reassess the initial optimism and demand more compensation for fiscal risk."
A significant element of uncertainty also revolves around who Burnham might appoint as Chancellor of the Exchequer. While current Chancellor Rachel Reeves largely has the market's confidence, she herself adjusted fiscal rules in October 2024, enabling up to $93 billion of additional borrowing over five years. Speculation is rife that Burnham may appoint someone from the Labour party's soft left, such as Ed Miliband or Shabana Mahmood, rather than reappointing Reeves. Any change to the fiscal rules or the appointment of a chancellor perceived as less fiscally conservative could lead to further market unease. The potential nationalization of Thames Water is another area of concern, as absorbing its large debt onto the public balance sheet could test fiscal rules.
