Britain's prospective next PM tries to placate bond markets after sell-off, gilts steady

• 10-year gilt yields eased to 5.15% while 30-year yields remained elevated at 5.83% after hitting record highs last Friday amid political uncertainty
• Burnham must first win a by-election in Makerfield on June 18 to enter parliament before challenging Starmer, with victory uncertain as Reform UK performed strongly in the seat
• Deutsche Bank analysts warn investors 'are likely to fear higher fiscal spending with Burnham as PM' despite his attempts to walk back comments about being 'in hock to the bond markets'

Summary

Key Development:

U.K. gilt yields stabilized Monday after a sharp sell-off, as political uncertainty surrounding Prime Minister Keir Starmer's leadership rattles bond markets. The benchmark 10-year gilt yield eased 2 basis points to 5.15%, while 30-year gilt yields fell to 5.83% after hitting their highest levels on Friday.

Political Context:

Labour Party's poor performance in recent local elections has triggered calls for Starmer's resignation. Multiple leadership challengers have emerged, including former Health Secretary Wes Streeting, former deputy Angela Rayner, and Greater Manchester Mayor Andy Burnham. Burnham, positioned on the party's left, is considered a frontrunner but must first win a parliamentary by-election in Makerfield scheduled for June 18 to be eligible for leadership.

Market Concerns:

Bond markets fear a new prime minister could abandon the UK's self-imposed fiscal rules limiting borrowing and spending, potentially destabilizing public finances. Burnham attempted to reassure investors over the weekend, walking back previous comments suggesting the UK was "in hock to the bond markets," stating he never said markets could be ignored.

Analyst View:

Deutsche Bank warned investors "are likely to fear higher fiscal spending with Burnham as PM." The Makerfield by-election outcome is uncertain, as it's a marginal Labour seat where Nigel Farage's Reform UK performed strongly in recent elections. Vote-splitting by the Green Party could also impact results.

Bottom Line:

U.K. borrowing costs remain at generational highs amid political turmoil, with fiscal policy direction uncertain pending potential leadership changes and the critical June 18 by-election.