Worries about deficits worsen! Starmers' "mighty opponent" enters the race, pushing 10-year UK bond yield to a new high since 2008.

Manchester Mayor Andy Burnham has gained a potential pathway to challenge Keir Starmer for the position of UK Prime Minister, leading to a sharp drop in UK government bonds. Investors are concerned that this could result in a new round of political instability, leading to a more relaxed fiscal policy being implemented. Worries about high energy costs and inflation globally have pushed the yield on UK 10-year government bonds to 5.133%, the highest since 2008, rising 14 basis points in a single day. Burnham's announcement of his intention to run for MP - a prerequisite to challenging Starmer - has led to the Pound dropping against the US Dollar, possibly marking its worst week since 2024. As of the time of writing, the Pound has fallen by 0.5% against the US Dollar to 1.3331, while the Euro remains stable against the Pound at 0.8707. A Labour MP in the House of Commons announced their resignation on the 14th to allow Manchester Mayor Andy Burnham to return to the House as an MP, thus making him eligible to challenge Labour leader Starmer for the position of Prime Minister. Despite facing numerous challenges, Burnham's prospects of becoming Prime Minister are seen as risky by British bond traders, who fear he may increase public spending, leading to an increase in UK government bond issuance. While Burnham has stated that his comments last year regarding the UK being "handcuffed" by the bond market were taken out of context, this has still caused anxiety among investors. He also mentioned that defense spending might be an exception. Mohit Kumar, a strategist at Jefferies, said: "The market is worried about a leftward shift by Burnham, and we may see the deficit increase further. Our fundamental expectation is for Starmer to orderly step down, with Burnham likely to become the next Prime Minister. We maintain a preference for steepening yield curves and are reducing exposure to the Pound." Following the Labour Party's defeat last week, Starmer has been working to hold onto his position as Prime Minister, raising concerns about his low support. This is a risk for bond investors, as they believe Starmer and his Chancellor of the Exchequer, Rachel Reeves, are more committed to controlling borrowing than their potential successors. Burnham's announcement has heightened tensions. According to a YouGov poll, the Manchester Mayor is the only senior politician in the UK with a net positive rating among voters and is a preferred choice among left-wing Labour members. Although he has not officially announced his campaign platform, his various statements on fiscal policy over the past year have caught the market's attention. Analysts point out that Burnham has proposed more eye-catching tax and spending proposals, which could pose a greater risk to public finances. These include halving the basic income tax rate and increasing borrowing to fund defense spending. However, it is not clear how the constraints of the presidency will curb his ambitions. Political uncertainty is posing a serious challenge to UK bond investors. The surge in global energy prices due to the Middle East conflict has hit UK government bonds hard, with rising energy prices potentially exacerbating inflation pressure. Since the US and Israel's attacks on Iran, benchmark yields have risen by almost a percentage point, and traders have shifted their expectations for the Bank of England's monetary policy from easing to tightening. A change of government could become another adverse factor. Since last week's local elections, the Pound has been the second-worst performing currency among G10.