UK gilts rally eases pressure on Burnham as borrowing costs retreat

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UK gilts rally eases pressure

Highlights

Ten-year UK gilt yields fell 0.15 percentage points to about 4.7 per cent this week, down from a 5.2 per cent peak last month.
Global factors such as easing Iran conflict risks and declining oil prices—now near $70 a barrel from above $100—have driven the rally in UK bonds.
Renewed investor caution persists as fiscal credibility and policy signals from Burnham's incoming government remain under scrutiny amid persistent concerns about UK growth and borrowing.

Global bond moves reshape the handover

As reported by Financial Times, the recent improvement in UK government bond markets is aligning with Burnham’s expected move into Downing Street, even though the change in sentiment is being driven mainly by global factors rather than domestic politics.

Burnham has had a difficult relationship with investors since saying in September that he did not want to be “in hock to the bond markets”. Since then, he has tried to reassure markets on fiscal discipline and borrowing restraint, but scepticism remains. Laura Cooper, a strategist at Nuveen, says bond markets struggle when credibility appears to weaken faster than fiscal numbers improve, and that a clean leadership transition and a chancellor seen as a continuity choice are important if gilt yields are to narrow their gap with U.S. peers.

The earlier rise in UK borrowing costs coincided with Burnham’s political ascent, but the main driver was the war in Iran, which pushed up oil prices and revived inflation fears across global markets. UK bonds are particularly sensitive to inflation and tend to be more volatile than U.S. Treasuries, leaving gilts more exposed when energy shocks hit and investors reassess the interest-rate outlook.

Lower yields offer room, but risks remain

This past week, beginning with Keir Starmer’s resignation, has coincided with a decline in benchmark UK borrowing costs. Ten-year gilt yields have fallen by 0.15 percentage points from the end of the previous week to about 4.7 per cent, down from a peak of 5.2 per cent last month.

Investors appear to be treating the Iran conflict as a risk that is no longer worsening, even though the Strait of Hormuz is not fully open and the peace deal between Iran and the U.S. remains fragile. Oil has fallen back towards $70 a barrel from levels above $100, global bond yields are edging lower, and expectations that the Bank of England might need to raise rates several times this year are fading.

Additional support has come from the U.S., where Federal Reserve chair Kevin Warsh has signalled a tough stance on inflation and indicated he could raise rates if needed. Some investors argue that gilts, which underperformed other sovereign bonds during the earlier sell-off, could now benefit more strongly in a recovery because UK yields remain relatively high against other developed markets.

That creates an opening for Burnham, but not a guarantee. Investors are still wary that a new government could pursue borrowing and spending plans that push yields higher again, while the longer-term answer to the UK’s debt burden remains stronger economic growth, an objective that has eluded successive prime ministers since the Brexit vote.

Our earlier report on Labour’s fast-tracked leadership handover explained how Keir Starmer’s resignation triggered an accelerated process expected to install Andy Burnham as party leader and prime minister within days. We noted that the compressed timetable was forcing Burnham’s team to rush key decisions on governing priorities, cabinet appointments and an upcoming economic policy speech, while also exposing internal party strains and jostling for senior roles.

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