Angela Rayner and Andy Burnham are among the leading candidates to replace Keir Starmer as Labour leader after the local elections, sparking concerns in the sovereign bond market over potential shifts in fiscal policy.
Market Anxiety Over Labour Leadership
Thursday's local and devolved government elections have drawn unusual attention from City traders dealing in UK government debt, amid speculation that a poor showing for Starmer's Labour party could trigger a leadership challenge. Sanjay Raja, chief UK economist at Deutsche Bank, noted that local elections have become a market-relevant event due to potential repercussions on fiscal policy and rules.
UK government borrowing costs have risen sharply, with 10-year gilt yields exceeding 5% for the first time since the 2008 financial crisis, and 30-year yields reaching their highest since 1998. Investors cite Britain's exposure to Middle East inflation shocks as a key factor, but political risk is also driving bond sell-offs.
Potential Successors and Market Perceptions
Angela Rayner, the former deputy prime minister, is the bookmakers' favourite to succeed Starmer, followed by Andy Burnham, despite his lack of a parliamentary seat. Other contenders include Ed Miliband, Wes Streeting, and Shabana Mahmood. Some candidates have drawn criticism from the City, particularly Burnham, who previously argued that Britain was too "in hock to the bond markets," triggering a rise in gilt yields. However, Burnham has since softened his economic stance in interviews with financial media.
Mark Dowding, chief investment officer at hedge fund RBC BlueBay, expressed fear of a more leftwing agenda, stating, "It's tax and spend. The concern in the market is that the tax take is already at a historic high, and government spending is very elevated." Despite this, many investors believe that any successor would have limited scope for radical fiscal shifts.
Reeves' Role and Fiscal Credibility
Avoiding bond market provocation has been central to Labour's strategy under Starmer and Chancellor Rachel Reeves. Reeves has pledged to maintain "ironclad" fiscal rules, even after tax hikes like the increase in employer national insurance contributions. There is speculation that any leadership contender might keep Reeves in place to smooth market concerns. One analyst noted, "She could become a linchpin for the market." However, this view may underestimate the intertwined fortunes of Starmer and Reeves and the desire of prime ministers to choose their own chancellor.
Rayner's Outreach to Investors
Rayner has been wooing City investors in meetings held by BNP Paribas and at an event with Signum Global Advisors. One analyst found her "reasonably persuasive and a lot more reasonable than expected." Investors remain wary of repeating the gilt market meltdown that followed Liz Truss's mini-budget, with Raja noting, "Markets are much more cognisant of that kind of volatility and how it plays out."
The challenge for any rival to Starmer will be changing direction without provoking a repeat episode of market turmoil.
