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UK government borrowing costs have reached their highest point in 18 years, coinciding with a decline in the pound, as the contest for Labour’s leadership takes an unexpected turn with Andy Burnham deciding to contest a by-election. While borrowing costs increased across Europe, the rise in the UK has been notably sharper. Market analysts attribute this shift to concerns over the possibility that a Burnham-led administration might increase government borrowing.
On Friday, the yield on the UK’s 10-year government bonds—essentially the interest rate the government pays to borrow money for a decade—climbed above 5.17%, a level not seen since 2008. Meanwhile, the pound slid approximately 0.3% against the US dollar to about $1.336, following a significant drop after Burnham announced his bid late on Thursday. Kathleen Brooks, research director at XTB, noted that the pound has fallen 1.5% over the week, suggesting that Burnham’s emergence as a candidate is viewed as the least favorable by markets compared to other contenders, such as Wes Streeting, whose resignation had a much milder impact.
Beyond the 10-year benchmark, long-term borrowing costs have also surged to significant highs, with 30-year gilt yields reaching 5.84%, the highest in 28 years. This upward pressure on borrowing costs coincides with broader economic concerns, including inflation risks driven by the ongoing conflict in Iran and resulting spikes in energy prices. Brent crude oil prices leapt above $109 per barrel on Friday morning before retreating slightly later in the day.
Investors seem particularly worried that a Burnham government would further escalate Britain’s already substantial public debt. Comments made by Burnham in a previous interview with the New Statesman, where he criticized the country’s dependency on bond markets, have amplified these fears. Russ Mould, investment director at AJ Bell, explained that even though there is no certainty that Burnham will secure a parliamentary seat or win the leadership, his stance has contributed to higher borrowing costs and a weaker pound. Mould also suggested that Burnham’s involvement might prolong political uncertainty, intensifying market instability.
Kathleen Brooks pointed to two main factors driving market reactions: a potential leftward shift in government policy and the ongoing turbulence in Labour’s leadership. “Overall, UK politics is a mess,” she remarked, warning that foreign investors are already retreating from UK gilts. She further suggested that if the pound or gilt markets experience sharp declines in the near future, leadership contenders may reconsider their timing for challenging the prime minister.
Jefferies economist Mohit Kumar echoed these concerns, stating to Reuters that markets fear Burnham’s more left-leaning approach could lead to increased budget deficits. The uncertainty has also affected UK equity markets, with the FTSE 100 index falling 1.7% on Friday, mirroring declines seen across European exchanges.
Andy Burnham, the mayor of Greater Manchester, has confirmed his intention to seek a parliamentary seat after the current MP, Josh Simons, agreed to step down to allow Burnham’s bid. Burnham expressed confidence in reviving Labour’s fortunes, pledging to make it a party people can believe in again and to “make politics work properly for people.” However, his path to leadership is not guaranteed. He still requires local party approval to become the candidate for the Makerfield constituency and must win what could be a competitive by-election against opponents including Reform UK
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