UK’s would-be PM tries to placate bond markets after sell-off

Britain’s gold yields were flat on Monday after coming under heavy selling pressure last week, as traders assess whether a challenge to Prime Minister Keir Starmer’s leadership poses a threat to the country’s financial stability.

When bond markets opened on Monday morning, the yield of the benchmark 10-year bond decreased by 2 basis points and remained at 5.15%. Yields on 20- and 30-year bonds rose to their highest level last Friday Highest levels since 1998. On Monday, the yield on the 30-year bond remained high but also fell 2 basis points to 5.83%.

Borrowing costs in the UK have been under pressure since the ruling Labor Party performed poorly in local elections across the country, prompting calls for Starmer to resign.

Starmer has so far refused to resign, but now faces potential leadership challenges from several Labor colleagues, including former Health Secretary Wes Streeting, his former deputy Angela Rayner and Manchester Mayor Andy Burnham.

Uncertainty in British politics has kept bond markets on edge as investors consider whether the new Prime Minister will ease self-imposed fiscal rules restricting borrowing and spending.

Burnham, who is considered to be to the left of her party, wanted to reassure investors at the weekend that the UK government’s fiscal policies would be in safe hands if she became Prime Minister, returning to previous comments that the country was “hostage to the bond markets”.

“I never said you could ignore bond markets,” Burnham told ITV News at the weekend.

“I said politicians were holding Britain hostage because we lost control over our finances and public spending when we devolved control of energy, water and housing,” he added.

Aberdeen senior political economist Lizzie Galbraith told CNBC on Monday that an “extra risk premium” has been added to UK gold.

“One of the factors here is uncertainty. We do not have a leadership race yet… [but] “What we’re potentially looking at here is months of policy debate, policy uncertainty and markets trying to predict where Labor might go if we face an eventual leadership fight, which seems to be the intention of key figures in the party,” he told CNBC’s “European Early Edition.”

The road for Burnham to replace Starmer has not been a smooth one.

In order to challenge the leadership, he must first become an MP. Although he has been given the green light to stand in the by-election in Makerfield in the north of England, victory is not guaranteed as rival parties are lining up for the seat.

Investors “will fear higher fiscal spending if Burnham becomes Prime Minister,” Deutsche Bank analysts said on Monday, even though Burnham backtracked on his comments on bond markets.

“So the focus is now on the by-election, which the BBC has reported will be on June 18. There is no guarantee it will win the by-election as it is a marginal seat for Labor and Nigel Farage’s Reform UK had a very strong showing in local elections earlier this month. Much will depend on how aggressively the Green Party contests the seat and splits the left-wing vote,” analysts said in emailed comments.

The debate over Brexit, which means the UK leaving the European Union, is likely to come to the fore again for the Leave-voting constituency of Makerfield; Reform UK is likely to focus on Burnham’s previous support for remaining in the bloc before the 2016 referendum.

Teneo Managing Director Carsten Nickel told CNBC that markets should prepare to see Brexit once again used for “short-term politics” rather than as an indicator of long-term policy direction.

“All I care about is [to hear] At this stage there will be a longer-term discussion about where to do it. [they] Do you want to go as Labour? “There seems to be a progressive consensus in the center, but it’s not there.”