UK PM candidate seeks to placate bond market after bond selloff

British gold yields, which came under heavy selling pressure last week, stabilized on Monday as traders assessed whether challenges to Prime Minister Keir Starmer’s leadership posed a threat to the country’s financial stability.

When the bond market opened on Monday morning, the yield on the benchmark 10-year Treasury note (Gold Bond) was 5.15%, down 2 basis points. Last Friday, 20-year and 30-year bond yields rose to their highest levels since 1998. The 30-year bond rate fell 2 basis points to 5.83% on Monday, although it remains high.

Britain’s borrowing costs have been under pressure since the ruling Labor party’s poor performance in national local elections led to calls for Starmer to resign.

Mr Starmer has so far refused to resign, but his chances of leadership may now be threatened by several of his Labor colleagues, including former health secretary Wes Streeting, former deputy MP Angela Lynagh and Greater Manchester mayor Andy Burnham.

Uncertainty in British politics has jittered bond markets as investors consider whether the new chancellor will ease voluntary fiscal rules that limit borrowing and spending.

Over the weekend, Mr Burnham, seen as a left winger of his party, denied previous comments in which he had suggested the UK was “at the mercy of the bond market” and appeared to reassure investors that the government’s fiscal policy would be safe if he became prime minister.

“I never said we should ignore the bond market,” Burnham told ITV News at the weekend.

“I said politicians had pushed Britain into a corner because they had lost control of public finances and public spending by relinquishing control of energy, water and housing,” he added.

Lizzie Galbraith, a senior political economist at the University of Aberdeen, told CNBC on Monday that there was an “additional risk premium” attached to British government bonds.

“One of the factors is the general uncertainty. We haven’t had a leadership contest yet…[but]potentially in recent months there has been policy debate, policy uncertainty and markets trying to predict what direction Labor will move if it ultimately gets a leadership challenge, which at this stage seems to be the intention of key players in the party,” he told CNBC’s “European Early Edition.”

Burnham’s path to succeeding Starmer will not be a smooth one.

First, to challenge leadership, you need to become a member of parliament. He has been given the green light for a by-election in Makerfield in northern England, but victory is not guaranteed as several rival parties are lining up to contest the seat.

Analysts at Deutsche Bank said on Monday that investors are “likely to fear that Mr Burnham’s appointment as chancellor will lead to more fiscal spending,” despite Mr Burnham retracting his comments on the bond market.

“The focus now is on that by-election, which the BBC reports will be held on June 18. It is a last-minute seat for Labour, and Nigel Farage’s Reform UK did very well in the local elections earlier this month, so there is no guarantee that he will win the by-election. Much will depend on how aggressively the Greens contest the seat and split the left-wing vote,” analysts said in emailed comments.

Debate over Brexit, the UK’s departure from the European Union, is likely to reemerge on the agenda of Leave-leaning constituency Makerfield, with Reform UK likely to focus on Mr Burnham’s previous support for remaining in the EU ahead of the 2016 referendum.

Kirsten Nickell, managing director at Teneo, told CNBC that markets needed to prepare for Brexit to be used again for “short-term politics” rather than indicating a long-term policy direction.

“The only thing I would like to hear at this stage is a long-term discussion about where they want to go as a Labor party. There is some sort of progressive consensus in the centre, but that doesn’t exist.”