UK borrowing costs hit 18-year high, pound falls as Burnham enters Labour leadership race

UK government borrowing costs reached an 18-year high and the pound declined as the Labour leadership contest gained a new twist with Andy Burnham’s decision to contest a by-election.

While borrowing costs for other European governments also rose, the UK’s increase was larger, which analysts attributed to market concerns that a Burnham-led government would boost borrowing.

The yield on 10-year government bonds, the interest rate the UK pays for a 10-year loan, exceeded 5.17% on Friday, the highest level since 2008.

The pound fell 0.3% against the dollar to about $1.336, following a sharp drop late Thursday after Burnham’s announcement.

Kathleen Brooks, research director at XTB, said the decline left the pound 1.5% lower for the week.

“This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting’s resignation did not have the same negative effect on the pound,” she said.

Over the past week, 10-year yields have surpassed levels last seen in 2008 three times, including Friday’s new high.

Long-term borrowing costs also rose to a 28-year high, with the yield on 30-year gilts peaking at 5.84% by early Friday afternoon.

Borrowing costs for other governments rose Friday as well, amid persistent concerns that the Iran war could drive up inflation due to surging energy costs.

The global oil benchmark Brent crude surged Friday morning to over $109 a barrel, up from $105.72 on Thursday, before easing to below $108 in the afternoon.

Investors, however, believe that a government led by Burnham would be more likely to increase Britain’s already high public borrowing.

In a New Statesman interview last year, Burnham said the government must “get beyond this thing of being in hock to the bond markets.”

AJ Bell investment director Russ Mould said that while there is no guarantee Burnham will win a parliamentary seat or contest the leadership, his comment to the New Statesman had “helped push UK borrowing costs higher and seen the pound slump.”

“A process involving Burnham also promises to be more protracted and ‘noisy’, thereby prolonging and exacerbating the uncertainty about the political situation in the UK,” he said.

Brooks said two key factors affecting the pound and borrowing costs are the prospect of a leftward shift in government and the uncertainty surrounding the current leadership turmoil.

“Overall, UK politics is a mess, there are already signs that foreign buyers are ditching the gilt market. If there is a major rout in the pound and/or gilts in the coming days, prospective candidates may need to assess whether now was a wise time to make a move against the PM,” she said.

Jefferies economist Mohit Kumar told Reuters: “Market’s fear is that Burnham would be more left leaning, and we could see further increase in deficits.”

UK stocks also fell Friday, with the benchmark FTSE 100 index down 1.7%, though other European markets recorded similar declines.

Burnham, the mayor of Greater Manchester, confirmed he will run for a parliamentary seat after MP Josh Simons said he would step down to make way for the leadership hopeful.

“We will change Labour for the better and make it a party you can believe in again,” Burnham said in a statement Thursday evening, vowing to “make politics work properly for people.”

But his bid for the top political job is far from certain. He needs the local party to select him as the candidate for the Makerfield constituency, then must win the by-election in a race that could be close with Reform UK.