UK 10-year gilt yield breaks 5% after PM Burnham signals fiscal flexibility

Gilt traders dumped UK government debt following comments by the new Prime Minister.

The government’s borrowing costs climbed sharply on Monday afternoon after Andy Burnham said he planned to increase government borrowing by taking advantage of “flexibility” in the current fiscal rules.

The new Prime Minister told reporters that his administration would use all potential room within the self-imposed spending constraints, which he had promised not to loosen while running for Labour leader.

“I’ve already said we’ll stick to the fiscal rules, and by that I mean the existing fiscal rules and use obviously any flexibility within them,” he said.

“But we’ll stick to the existing rules and I’ve made that very clear in Downing Street. So none of this is about taking risks with the economy.”

Burnham’s remarks immediately led bond investors to sell UK government debt. The sell-off was concentrated in longer-duration bonds, which tend to be more sensitive to fiscal sustainability and less closely correlated with interest rate expectations.

Borrowing Costs Rise as Sterling Also Falls

The yield on the 10-year gilt – the benchmark for a country’s long-term borrowing capacity – climbed as much as eight basis points to break 5% for the first time this week. Meanwhile, interest on the 30-year gilt rose nine basis points to its highest level since the height of the conflict in the Middle East.

Shortly after the comments, Burnham also ousted Rachel Reeves as Chancellor, with Shabana Mahmood widely tipped to be her successor.

The fall in gilt prices – which move inversely to bond yields – underscores the delicate fiscal tightrope that Andy Burnham must tread in his first few months in power. Historically high borrowing levels and stubbornly sticky inflation have left Britain’s borrowing costs higher than any other G7 economy.

The UK’s government debt is now on a par with its annual GDP, while the country’s outsized reliance on international energy markets means economists believe the UK will have to contend with inflationary pressures for as long as the conflict in the Middle East persists.

“When you look at the detailed moves this afternoon the market has shown some emerging signs of nervousness about the mood music four hours into the new regime,” said Neil Wilson, strategist at Saxo Markets.

“Mood music so far is the lurch to the left [is what] markets were worried about – big spending vibes,” he added.

Sterling Also Sold Off

Parallel to the rising borrowing costs, traders also offloaded sterling in a sign that a ‘sell Britain’ trade was gaining momentum. The pound reversed gains made against the dollar last week, falling 0.2%.

Earlier, Burnham was confirmed as the UK’s next Prime Minister, replacing Keir Starmer who stepped down after the former Manchester mayor was made Labour leader on Friday. In his first speech leading the country, he promised to build a “new economy” characterised by greater public control of “life’s essentials”.

“We will make this moment a circuit breaker for Britain, bringing forward the biggest changes in the last 40 years, a new political model and a new economic model,” Burnham said, adding: “We will take power out of here and carry it into every postcode in the land, so that they can do more, and in doing more, build a new economy where we put life’s essentials back under stronger public control.”