UK political turmoil sends 10-year gilt yield past 5.1%

A leadership crisis threatening to unseat UK Prime Minister Keir Starmer has sent investors fleeing from British assets, with the 10-year government bond yield surging past 5.1 percent for the first time this year on fears of a populist, leftward shift in fiscal policy. The move was triggered by Greater Manchester Mayor Andy Burnham on Friday securing a path to run for a parliamentary seat, a necessary step to challenge for the country's leadership.

"A Labour government led by Burnham would likely mean more spending and borrowing," said Elias Haddad, global market strategist at BBH. "With UK nominal GDP growth already below the 10-year bond yield, containing debt growth is becoming more challenging. The bias for UK fiscal credibility, the pound, and UK gilts is to the downside."

The market reaction was swift and severe. The pound sterling dropped to a near one-month low against the dollar, while the 10-year gilt yield climbed to 5.137 percent, a high among G7 nations. UK domestic-focused stocks also came under pressure, with strategists at Goldman Sachs highlighting banks, local equities, and real estate as most at risk from the combination of policy uncertainty and higher borrowing costs.

The turmoil puts the upcoming by-election in the northern English constituency of Makerfield, expected in the next five to six weeks, into sharp focus. A victory for Burnham would allow him to trigger a formal leadership contest that he is widely expected to win, potentially ushering in a prolonged period of political and market instability through the summer.

The 'Burnham Effect' on Markets

Investors are repricing UK assets based on the prospect of Burnham, a popular figure from the Labour Party's left wing, taking power. His previous statements accusing the government of being "in hock to the bond market" and a proposal to exempt defense spending from fiscal rules have fueled expectations that he would unwind the fiscal restraint of the current government. While he has since softened his tone, analysts say it has not been enough to calm market nerves.

"The next Labour leader will come from the left of the party," said Neil Mehta, a macro portfolio manager at RBC BlueBay. "UK financial assets and the pound will carry a higher political risk premium for an extended period."

Burnham's high popularity adds to the credibility of his challenge. A recent YouGov poll showed him with a +4% net favorability rating, the only senior UK politician in positive territory. In contrast, Prime Minister Keir Starmer's rating has plummeted to -46% after his Labour party suffered heavy losses in recent local elections, losing hundreds of council seats to the anti-immigrant Reform UK party and the Greens.

Starmer's Position Weakens

The move by Burnham comes at a moment of maximum weakness for Starmer, who is facing calls to resign from more than 80 of his own lawmakers. The crisis escalated this week when Health Secretary Wes Streeting resigned, citing a lack of "vision" and "direction" in a stinging letter to the prime minister before endorsing Burnham's bid.

The Makerfield by-election is a high-stakes gamble for all involved. The seat, held by Labour since 1983, has seen its majority shrink, and the Reform UK party will contest it aggressively. A loss for Burnham would likely secure Starmer's position but confirm the deep fractures in the Labour party's voter base. A win, however, would set the stage for a leadership battle that could redefine the UK's economic policy for years to come. The political drama adds another layer of risk for UK assets, which are already grappling with energy price shocks stemming from conflict in the Middle East, creating what JPMorgan strategists call a "double pressure" on the nation's economy and international standing.

This article is for informational purposes only and does not constitute investment advice.