City bond traders are preparing for a turbulent period as Andy Burnham moves closer to an uncontested path into Downing Street following key political developments.
Former health secretary Wes Streeting, widely considered the most likely challenger to Burnham, threw his weight behind the former Manchester Mayor’s leadership bid today.
The decision by Streeting not to stand dramatically cut the odds of a prolonged leadership contest, which analysts said could itself act as a stabilising force for financial markets.
Richard Hunter, head of fixed income at Quilter Cheviot, warned that “markets are going to be a bit jumpy as [Burnham] takes over and leads into any Budget.”
Hunter added that markets do not want the uncertainty of “a two to three month contest where all sorts of wacky ideas get put forward,” underlining investor preference for a swift transition.
However, Hunter also cautioned there remained a “risk of missteps” from Burnham, given that his policy platform had not been fully “road-tested” ahead of entering government.
Joe Nellis, economic adviser at MHA, noted that “the realities of governing means that [a campaign] is not as useful an indicator of policy direction as it may appear.”
Nellis further warned that “a contest risks delaying clarity on the government’s direction, prolonging uncertainty and adding to market volatility,” reinforcing the case for a quick resolution.
Investor nerves were partly calmed by Burnham’s stated commitment to Rachel Reeves’ fiscal rules, despite a string of expensive campaign promises including nationalising some utility firms and compensating Waspi women.
Michael Field, chief equity strategist at Morningstar, said bond markets are “seeing through some of the populist ideas that he’s spouted a little bit and saw them for what they are.”
Field described Burnham’s commitment to fiscal rules as “a dose of reality,” adding that “previous Chancellors and Prime Ministers have been in hock to the bond markets — you can ignore them for a while, but ultimately you can’t ignore them forever.”
Field suggested it was possible that the government’s budget deficit could be reduced under a Burnham-Streeting partnership in Downing Street, with the ousting of Starmer, and before him Liz Truss, sharpening minds around fiscal discipline.
Gilt yields were largely unmoved immediately following Keir Starmer’s resignation, and bonds rallied after Streeting publicly backed Burnham’s bid for the Labour leadership.
The 10-year yield, a crucial metric for how much the government pays to borrow, was down three basis points by midday, reflecting measured market confidence.
Oliver Faizallah, head of fixed income research at Raymond James, told City AM the muted reaction was “largely because the outcome had already been priced in” by investors.
Faizallah said that should the coronation proceed as expected, bond investors will be “paying very close attention to any rhetoric on the fiscal rules, planned spending and change in Chancellor.”
He added that “the lack of gilt market reaction shows the market does believe that Burnham is widely seen as the front-runner, and markets appear relatively comfortable with this prospect, particularly considering his recent rhetoric emphasising fiscal discipline.”
A handful of names have been floated to lead the Treasury under a Burnham premiership, with Wes Streeting now viewed as a leading candidate following his high-profile endorsement.