File image of Andy Burnham: Labour Party, sourced: Flickr, licensing: CC 2.0.
Long-dated bond yields can rise further if Andy Burnham succeeds in the Makerfield by-election, a new analysis from Lloyds Bank shows.
New analysis by the high-street lender shows the UK ten-year bond yield has risen by more than those belonging to peer countries, which is a sign that investors see the UK’s inflation outlook as being riskier.
“The increase in UK 10y term premium has predominantly been driven by expectations of a more expansionary fiscal stance, as well as political uncertainty,” says a note released Wednesday by Lloyds Bank.
The value of longer-dated bonds – for example the ten-year bond – are determined by central bank expectations and the term premium. The term premium reflects the risks associated with inflation, which is in turn linked to policy and political risks today.
As bond values fall, the yield they offer investors rises. For the government, that rising yield means repayments rise too, creating a negative feedback loop whereby governments pay more to borrow.
Ten-year bond yields rose as high as 5.2% on May 18, the highest since 2008, with economists citing the combination of higher energy costs and elevated inflation and political risk premiums.
“These two themes have been at the fore since the May local elections, where Labour shed over half of the seats they were defending, leading to vocal calls for a change in leadership, risking a further leftward policy shift,” adds Lloyds.
The analysis say that rates will rise further if the probabilities of Andy Burnham becoming Prime Minister continue to rise in a linear fashion until the Makerfield by-election.
“There remains scope for a further increase in 10y term premium (c. 40bp if the move is consistent with the dynamics of the past quarter),” says Lloyds.
Burnham is perceived as the left-most among the likely replacements of Keir Starmer, who has previously argued for the government to effectively ignore bond markets in order to borrow more to fund political projects.
For instance, Burnham has argued in favour of doing this to fund social housing and defence.
He has since rowed back on his desire to ignore markets following clear signs of market unease following his announcement that he will compete in the Makerfield seat.
“Burnham has, in recent days, made a proactive effort to soothe markets, emphasising a commitment to the continuity of the fiscal rules. Such a tone matters at the margin in a market that is already sensitised to fiscal risk, but it has yet to meaningfully unwind the premium embedded in gilt yields,” says Lloyds.