Investors are concerned about the UK after heavy losses in traditional Labour strongholds including Wales reignited questions over Sir Keir Starmer’s future.
Wes Streeting resigned as health secretary last and Labour’s National Executive Committee has cleared the way for Andy Burnham, the Manchester mayor, to fight the Makerfield by-election and return to Westminster.
Mr Streeting has pulled the trigger on his bid to replace Sir Keir Starmer, confirming this weekend that he will enter any Labour leadership contest.
Aberdeen said it had shifted some of its cash into shorter-dated UK debt – which is primarily driven by the outlook for inflation and interest rates – believing a weakening economy would prompt the Bank of England to lower borrowing costs.
Guillermo Felices, global investment strategist at PGIM, which oversees $1.5tn in assets, said leadership uncertainty could pile pressure on UK borrowing costs for months.
He said: “Bond markets and markets generally hate uncertainty.
“The timeframe we’re seeing for the by-election is between six to eight weeks, so essentially that means we’re in a political vacuum for almost two months, and that’s terrible for markets.”
Moyeen Islam at Barclays warned the shift in sentiment could be permanent, which would mean adding billions of pounds to the cost of servicing Britain’s near-£3tn debt pile.
“It might well be the case that we are transitioning to a higher gilt term premium environment if there are persistent worries over fiscal loosening, structurally higher inflation and underlying political uncertainty,” he said in a note to clients.
Energy shares sell-off
Fears of a Burnham premiership sparked a sell-off in major energy shares and the National Grid last week.
Mr Burnham has repeatedly advocated greater state control over housing, transport and energy and this weekend hinted at a programme of mass nationalisation.
Speaking to Channel 4 News, the Mayor of Greater Manchester called for the UK to go down a “completely” different path to the last 40 years by putting “more things back under stronger public control”.
He took aim at a wave of deregulation under Margaret Thatcher, adding: “The country gave away its control with basic things that people depend upon every day and that was a big mistake in my opinion.”
However, Mr Burnham has insisted he would not be reckless with the public finances, despite claiming he would not want to be “in hock” to the bond market.
Mr Burnham said earlier this year he would never “ignore” borrowing rules even as he called for more public ownership of council housing, social housing and rail renationalisation.
Labour MPs have stoked fears that a lurch to the Left would lead to more borrowing, with Paula Barker MP stating last week that markets would “have to fall into line” with a Burnham agenda.