Are gilt markets acting as ‘the UK’s political police’?

Bruising brushes with financial markets have been the fate of Labour “down the ages”, said William Keegan in The Observer. Back in the 1960s, Harold Wilson complained about “the gnomes of Zürich” – a derogatory reference to international bankers then going “short on the pound”. This time, the threat is closer to home – in London’s febrile government bond markets.

‘The risk of some kind of accident is real’

Before this week’s escalation of the leadership fight, economists were playing down the political angle. “For all the noise, politics isn’t what’s driving yields higher right now,” James Smith of ING told The Times. “The overwhelming driver is still the energy crisis, oil prices and the impact on BoE interest rates.” But as a dramatic sell-off got under way, it became harder to discount the sense that debt markets are indeed badly rattled by Labour’s leadership woes. The 30-year gilt yield, which hit 5.81% on Tuesday, is at the highest this century. Yields on 10-year gilts (the benchmark for mortgage rates), at 5.13%, are at their highest since 2008.

It’s “a rubbish time” to be having a political crisis, said Daire MacFadden in the Financial Times. “Sadly, that’s precisely what we have.” Any leadership challenge is “all but certain to herald a move to the left and potentially an increase in government borrowing”. To some extent, the gilt market had already priced this in, but “the risk of some kind of accident here is real”.

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It doesn’t help that Andy Burnham – who last year observed that government shouldn’t be “in hock” to the bond market – “keeps talking about bond markets as if they are some sort of entity he can bamboozle with jargon”, said John Stepek on Bloomberg. The view from his camp seems to be that renationalising various sectors of the economy will inherently make them more productive – so gilt markets “will be happy to fund the borrowing”. That’s a somewhat “courageous” assumption.

‘Bond vigilantes’ on the rise

“It seems like the only supporters that Keir Starmer has left are the so-called bond vigilantes,” said Robin Wigglesworth in the FT. As they point out, higher borrowing costs are already chipping away at the chancellor’s £24 billion of fiscal headroom, which forecasts suggest could halve. But for how long “can the gilt market act as the UK’s political police”?

Among Starmer’s rivals, Burnham is perceived by traders as the biggest threat and Wes Streeting as the least risky. We must hope he prevails and persuades investors to lend at “a lower premium” to Britain, said Adam Smith in The Telegraph.

The “intriguing paradox” of Labour politics is that the leader most distrusted by the Left may ultimately be the “most capable of financing the expansive social-democratic state that they all crave”.