Burnham Bid means Britain is paying a ‘Higher risk premium for political uncertainty’

Burnham Bid means Britain is paying a ‘Higher risk premium for political uncertainty’ – warn UK analysts

 
Further to the news that PM hopeful Andy Burnham cancelled a hedge fund call about Bond market pressures (source: FT) two key market analysts respond.
 

Daniela Hathorn, Senior Market Analyst, Capital.com
 
“Markets have begun to price a higher probability of a labor leadership change and a potential Andy Burnham victory, but UK assets do not yet appear to be fully reflecting that outcome. The recent rise in gilt yields, weakness in sterling and underperformance in domestically exposed sectors suggest investors are demanding a higher risk premium for political uncertainty, rather than making a definitive judgment about a future Burnham administration. So to me it seems that markets are reacting more to the possibility of policy change than to any specific fiscal agenda.
If investors become convinced that a Burnham-led government is the most likely outcome, the market reaction could become more pronounced. Given expectations about greater spending and fiscal deficit, long-dated gilt yields would likely face further upward pressure, sterling could weaken and sectors sensitive to taxation or public spending policy may come under greater scrutiny. But for now UK assets remain driven by a combination of domestic political uncertainty and broader global themes such as inflation, energy prices and central-bank policy, suggesting markets are pricing the risk of change rather than the outcome itself.”

Mauricio Masondo Head of Growth, Galytix said:
 
“Markets price a probability curve across a time window, not an end-point outcome. The idea that markets have ‘fully priced’ a Burnham premiership overstates a deeply conditional outcome – contingent on the Makerfield by-election on 18 June, a leadership contest being triggered, Burnham winning it, and then governing with the fiscal loosening the market fears. As we stand, the ten-year gilt has firmed back towards 4.90% as the vote nears, while sterling holds near 1.346. The premium is accumulating in the long end of the curve – not in the currency, and far less so in credit.

“That distinction is under-appreciated. Sterling corporate spreads have stayed contained relative to the move in gilts, so the hit to credit is coming through the risk-free rate, not through any real widening in risk premia. The short-term risk is therefore a tail, not a base case. Stable spreads can mask a low-probability, high-severity scenario: a disorderly repricing of the 2022 kind, should fears over gilt issuance and fiscal credibility crystallise. That pressure lands first on the leveraged and sub-investment-grade names, well before headline spreads show it.”

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