British government borrowing costs experienced a dramatic surge as Andy Burnham's leadership challenge intensified, with 30-year gilt yields hitting levels not seen since 1998 and reaching fresh recent highs of 5.86%, up 20 basis points from previous levels. Ten-year gilt yields also surged to 5.18%, firmly above 5% as markets braced for potential political instability. According to Bloomberg, the 30-year British gilts jumped by almost 20 basis points to 5.86% in latest trading, while 10-year gilt yields surged as much as 19 basis points to 5.18%, marking the highest level since 2008. This represents a significant escalation from previous surges, with the 30-year gilts having previously jumped by almost 13 basis points in early trade to reach a session high of 5.779%. The latest surge came after Burnham secured permission from Labour's National Executive Committee to run for Parliament, marking a reversal from January when he was denied the chance to run for a separate seat.
The UK bond market decline occurred against a backdrop of rising borrowing costs globally, particularly due to renewed concerns about inflationary impacts from the Iran war and surging oil prices after the closure of the Strait of Hormuz. As reported by The Economic Times, U.S. Treasury yields hit their highest levels in around a year on expectations of Federal Reserve rate hikes. However, the increase was sharper for British government bonds, which have performed worse than peers since the start of the Iran war due to concerns about the country's natural gas reliance and recent prime ministerial transition worries. The UK has been among the hardest hit partly due to sticky inflation, heavy reliance on very expensive imported energy, and the growing proportion of our gilts held by jumpier foreign investors and hedge funds. Benchmark UK yields have risen by almost a percentage point since the US and Israel's attacks on Iran, while traders have flipped pricing for Bank of England monetary policy from interest-rate cuts to hikes as inflationary fears mount.
The bond market selloff extended across the entire yield curve, with five-year notes touching an all-time peak of 2.00% and 20-year bonds reaching 3.615%. According to The Economic Times, the benchmark 10-year JGB yield rose as much as 10 basis points to 2.73%, marking the highest level since May 1997. Ten-year UK gilt yields were up by about 11 basis points, more than double the rise for equivalent German bunds, highlighting the market's specific concerns about UK political stability. Thirty-year yields rising above 6% would look attractive, according to Lauren van Biljon, senior portfolio manager at Allspring Global Investments, and Paul Skinner, investment director at Wellington Management, while Lloyd Harris, head of fixed income at Premier Miton, said 10-year yields at 5.30% would start to appeal. The pound weakened alongside the bond market surge, with the pound put on track for its worst week since 2024 against the dollar at 1.3331 and 0.2% down against the euro at 0.8725 at 5:40 p.m. in London.
The surge in bond yields has significant implications for Britain's fiscal position, with the cost of servicing UK debt in 2029-30 projected to increase by about £7 billion from March predictions if current yields are factored into forecasts. As reported by The Economic Times, Britain's borrowing costs are already among the highest in the G7, with payments on existing debt interest standing at about £111 billion a year, or 8.1% of total public spending. This represents money that could instead be spent on hospitals, education, or defence. The UK's national debt has swelled sharply since the pandemic and is now at its highest relative to the size of the economy since the 1960s. The Labour government has hobbled growth by piling taxes on employers while repeatedly refusing to tackle a ballooning welfare bill, creating a fiscal path that has been imposed by Labour MPs, including those with strong support for Burnham.
Burnham's leadership campaign remains a risk predicated on a gamble, as he must win a by-election in Makerfield — thoughtfully vacated by Josh Simons — to have a tilt at the top job. He faces a challenge from Reform UK, which has vowed to contest the seat fiercely. Wes Streeting, the former health secretary who has also been linked to a potential leadership challenge, said Andy Burnham was Labour's 'best chance' of winning the 'tough' Makerfield by-election. Burnham's various comments regarding fiscal policy over the last year have attracted market attention, following his 'in hock' remarks and subsequent statements about Labour's budget constraints staying in any context. He has suggested there could be an exception for defense spending that would sidestep the government's fiscal rules. Burnham has put forward more eye-catching proposals on tax and spending that could put the public finances at greater risk, including halving the basic rate of income tax and increasing borrowing to fund defense spending. While there are plenty of hurdles on the path to 10 Downing Street, the prospect of Burnham becoming prime minister is seen as a risk by traders, who fear he might increase public spending and gilt issuance. The market's fear is that Burnham would be more left-leaning, and we could see a further increase in deficits, according to Mohit Kumar, a strategist at Jefferies. Our base case is one of a managed exit for Starmer and Burnham likely becoming the next PM, with markets keeping a steepening bias on the curve and an underweight for the currency.
