After his spectacular victory in the Makerfield byelection, markets are growing a little scared of Andy Burnham, who looks set to replace the UK prime minister Keir Starmer with an agenda distinctly to his left. While this fear is understandable, it’s also overdone. Ultimately, investors have Liz Truss to protect them. “Truss showed us you have to have credibility with the bond markets to survive,” said Ben Ford of Macro Hive in London. “Otherwise, you don’t outlast a lettuce.” Burnham evidently knows this and will regulate his policies accordingly.
Friday saw real 10-year gilt yields jump to a new high for the year, while sterling dropped to near its 2026 low against the dollar. This is reminiscent of the dynamic during the selloff prompted by Truss’ disastrous mini-budget in 2022, and of numerous emerging markets crises over the years. Higher bond yields typically support a currency; this combination on its face suggests concern about the government’s ability to pay its debts.
But this shouldn’t be overstated. True concern about fiscal irresponsibility would show up in the UK’s sovereign default swaps, and there’s no sign of it. The pandemic, and then the Truss crisis two years later, both caused major spikes; current pricing is benign by comparison.
There are broader reasons why a major market reaction should be avoidable if and when Burnham enters Downing Street. First, the uncertainty is minimal. The scale of Burnham’s victory — far more emphatic than expected at the beginning of the campaign, and not dependent on splits in the right-wing vote — leaves traders virtually certain that he wins the premiership before the year is out. Labour is debating whether to hold a contest or prod Starmer to acquiesce in a Burnham coronation, but that’s of little interest to investors. Burnham will win, and however Labour thinks it is best to organize the transition — the recent experience of uncontested coronations for Kamala Harris in the US, or Theresa May and Rishi Sunak in the UK, suggests it might be politically wise to hold a contest. The outcome will be the same.
Next, there is the evident disciplining effect that the Truss precedent is having on Burnham. One key signal is his choice of personnel — this week he’s announced that his advisors will include former Bank of England chief economist Andy Haldane, the former Goldman Sachs & Co. economist and Conservative government minister Jim O’Neill and the former head of the Office of Budget Responsibility Richard Hughes. All are A-list celebrities for the gilt market. Calling them in is reminiscent of Barack Obama’s conscription of the legendary Federal Reserve chairman Paul Volcker as an advisor during his presidential campaign in 2008, in a successful move to convince markets he could be trusted.
The message: Burnham understands the risk of a Liz Truss Moment and will go to lengths to avoid it. He’s also corrected course on his most notable gaffe to date, his comment last September that “we’ve got to get beyond this thing of being in hock to the bond market.” That line, much-repeated, suggested an arrogant refusal to understand the market’s power, but his most recent pronouncements have corrected course neatly: He now says he’ll “reject any change to the UK’s fiscal rules” if he wins.
“Burnham has already rowed back on some ideas in recent weeks, which hints that he might not lead in such a different way to the status quo should he become prime minister,” said Dan Coatsworth, market strategist at AJ Bell Plc. “He appears to have backed down from earlier suggestions that he didn’t want to be told what to do by the bond markets.”
His ideas on nationalization, which alarmed some foreign investors and are key to positioning him on the left for Labour, also grow less scary on close examination. His main target is Thames Water Ltd., possibly the UK’s most unpopular utility, which at this stage should be regarded as a distressed company.
His choice of chancellor could be a flashpoint in future. A key ally, the former Labour leader Ed Miliband, a figure regarded as on the left of the party, is known to want the job. That would not be a popular appointment with gilt investors — but, again, Miliband is no fool, and was apparently instrumental in another Burnham U-turn on paying compensation to so-called Waspi women who complain that they missed out on pensions thanks to past changes in the retirement age.
Also in Burnham’s favor, the economic environment is shifting. The UK’s latest inflation number was lower than expected and, for the first time since the pandemic, the core measure was slightly slower than in the US. That reduces the upward pressure on the Bank Of England’s monetary policy, which remained on hold this week, and on gilt yields.
The hostile reaction in the gilt market to the Makerfield result, albeit mild, shows that there’s still a concern about what a Burnham administration would mean for fiscal policy. The greater long-term risk he faces is arguably the same one that has doomed Starmer and his chancellor Rachel Reeves — avoiding a Truss Moment can translate into overly cautious policies that limit downside, but also rule out any chance of a strongly positive upside. Under Reeves, the Treasury floated a number of options for new policies via leaks last year, but abandoned them if they got a negative market reaction.
The next general election must happen by 2029. As it approaches, the risk is that a Burnham premiership could be languishing, and then lurches toward more expansive fiscal policy to head off the Green party to its left. But that’s in the future. For now, Burnham and his team understand the signals the bond market are sending them; whatever mistakes they make, they won’t be the same ones made by Liz Truss.
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