Wealth manager Rathbones reduced its exposure to UK government bonds (gilts) ahead of the Makerfield by-election, citing concerns that Andy Burnham, now the likely next prime minister, might pursue more expansive fiscal policies. This preemptive move was driven by a desire to avoid a repeat of the bond market volatility seen under former Prime Minister Liz Truss, whose unfunded tax cuts led to a significant market backlash and her swift ouster. While acknowledging that Burnham has already tempered his rhetoric by expressing a commitment to fiscal prudence, Rathbones took a cautious approach, given his previously stated aim to avoid being "in hock" to the bond market, which was seen as a potential precursor to increased spending.
The Makerfield by-election saw Burnham secure a decisive victory with 54.8% of the vote, far outpacing the Reform candidate's 34.5%. Despite the strong win, initial market reaction in gilts and sterling was muted. This was partly because Burnham's victory was anticipated, and investors may have been somewhat relieved by his clear triumph over Reform, whose fiscal approach is largely untested. However, analysts are keenly awaiting more details on Burnham's economic policies and his choice for Chancellor. Public finance data published on the day of the Makerfield result showed a larger-than-projected deficit for May, adding to the fiscal challenges the new government will face.
While 10-year gilt yields have been rising this year, climbing from 4.47% to 4.78%, Rathbones noted that this trend is in line with global movements, such as the increase in 10-year US Treasury bond yields from 4.16% to 4.45% during the by-election week. This broader shift is largely attributed to inflationary pressures from the war in Iran and a reassessment of the Bank of England’s monetary policy, with market expectations shifting from cuts to a potential interest rate increase. Sterling's performance has also been relatively resilient, showing little stress against the euro and rebounding slightly against the dollar on results day, despite a stronger dollar globally.
In the aftermath of the by-election, Rathbones is advising clients to maintain their existing investment paths. They believe that while speculation about policy changes, such as capital gains tax increases or pension rule adjustments, will continue, investors should wait for concrete evidence of policy shifts before taking action. The firm views Burnham's reported addition of former Bank of England Chief Economist Andy Haldane to his advisory team as a positive step towards shoring up his economic credibility. However, the exact shape of the new government and the identity of the Chancellor remain crucial factors for market participants, who are likely to firm up their opinions once more clarity emerges on these fronts.
