Sterling slides to five-week low as bond yields surge on leadership uncertainty
Manchester mayor Andy Burnham’s parliamentary bid triggers market sell-off, with analysts warning of elevated political risk premiums and potential volatility in gilt markets.
The pound sterling has fallen to a five-week low against the US dollar, heading for its worst weekly performance in 18 months as UK government borrowing costs surged. The currency dropped by almost three cents, or 2%, during the week to $1.336 on Friday, marking the largest weekly decline since Donald Trump’s election win in early November 2024. The depreciation coincides with a sharp rise in UK government borrowing costs, driven by political uncertainty surrounding the Labour leadership and broader inflation worries linked to rising oil prices.
Market turbulence intensified following the announcement by Manchester mayor Andy Burnham that he would seek a parliamentary seat in Makerfield, positioning himself to challenge Prime Minister Keir Starmer. Investors reacted negatively to the prospect of a Burnham premiership, citing concerns that his fiscal views could lead to looser borrowing rules and increased government spending. Kathleen Brooks, research director at XTB, described Burnham as the "least market-friendly" candidate, noting that the market reaction differed significantly from the response to Wes Streeting’s resignation.
UK government bond yields jumped sharply, reflecting the sell-off in sovereign debt. The yield on 10-year bonds rose to almost 5.17%, exceeding the 18-year high set earlier in the week and reaching the highest level since 2008. Thirty-year bond yields also climbed, hitting 5.84%, a rise of 19 basis points that surpassed the 28-year high reached earlier in the week. The surge in yields mirrors broader sell-offs in US and German sovereign debt, though the UK’s increase was more pronounced.
Analysts suggest that the bond market may impose fiscal discipline on a potential Burnham-led government, but warned that the process could be volatile. Neil Wilson of Saxo UK noted that markets would likely resist a left-leaning prime minister with known scepticism toward bond markets. He highlighted that the UK’s fiscal position is becoming increasingly fragile, particularly given the geopolitical risks associated with the Strait of Hormuz being shut, which continues to fuel inflation concerns.
Despite the market’s wariness, Burnham remains popular with the general public. Bill Diviney of ABN Amro noted that Burnham is the only major UK politician with a net positive approval rating in YouGov polling. However, financial stability may depend on continuity in the Treasury. Diviney indicated that Rachel Reeves retaining her role as chancellor would be a key factor in stabilising markets, as it would signal a continued commitment to existing fiscal rules.