New UK prime minister, same bond market

Rob Armstrong (0:06)

Pushkin.

The UK Political Merry-Go-Round has rotated once again, and we have a new prime minister in waiting. Today on the show, UK politics and UK markets and the connections between them. This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from my home in Brooklyn, New York. Joining me today is the incomparable and irreplaceable Ian Smith, all the way from London. Ian, what is it you do for us again? What's your job?

Ian Smith (0:46)

I'm the Senior Markets Correspondent, Rob, here in London.

Rob Armstrong (0:49)

I am gonna be the surrogate American listener today and pretend to be even more ignorant than I am about what's going on over there in markets and in politics. Let me start with a broad question. You have a new Prime Minister in Wadden. He is some kind of pinko communist, if you believe what you read in the American press.

And yet the Giltz market, which is supposed to be the thing that keeps the pinko communists over there in line, is going up or at worst is indifferent to the whole thing. What is going on? Maybe you can start by just giving us a thumbnail sketch of who this person is.

Ian Smith (1:36)

So Andy Burnham is the mayor of Greater Manchester. He's just won the Makerfield by-election, which has given him a seat at Westminster, and means he is likely to become our next Prime Minister in a string of Prime Ministers in recent years. It's a brave new era in British politics.

Rob Armstrong (1:52)

It's a lock though, right? It's gonna be him. There's no chance somebody sweeps in at the last minute here. It's gonna be him.

Ian Smith (1:59)

It's gonna be him. It's a lock. He's a really interesting figure. A senior labour figure for some years.

You know, figurehead on the left of the party. A champion of devolution, moving more power away from London and to other areas of the UK. He gave a big speech this week on moving some of the power in the UK away from Westminster. So it's a really interesting time that he's taking over, but he obviously inherits a lot of the challenges that Sir Keir Starmer, who will be leaving as the UK promised, faced, such as the UK's high debts, its sluggish growth, its unstable politics. So it's not going to be easy for him.

Rob Armstrong (2:38)

No, but the guilt market, at least looked at naively, glancing at the chart of the 10-year guilt yield, doesn't seem to be that worried on his behalf, that it doesn't seem to be signaling that he's a fiscally irresponsible person or he'll re-ignite inflation and so on. What do you make of what guilts are doing right now?

Ian Smith (3:06)

So it's interesting. Yeah, as you say, he's much caricatured by investors, Andy Burnham. I spoke to investors when he was coming to the fore and there was a lot of leadership speculation around Starmer. He was viewed among the leading candidates as the most market negative of them.

There's a perception among guilt investors that he will look to borrow more and he will shift the party and the government to the left. And yet, when it became very clear that he was going to become the next UK Prime Minister, the market reaction has been very calm.

Sterling has been very stable. Guilt yields actually took down, which means prices rose on the day that he won the Maker Filled by-election. So the reaction has been very calm from investors. I think there's a few reasons, some of which have nothing to do with the UK, which is the inflation threats to the global economy and to the UK, are lessening with the Iran war, to some degree abating. But some of them are about the things that he has said and the face that he has presented to investors, and he sought to present himself as more of a centrist figure.

Rob Armstrong (4:07)

Let's start with the war. It was striking to me that in the war's inflation scare, which was a global event where it looked like oil prices were going to go banana, because there was going to be second order effects on prices all over the world. We actually started to see that in some places.

Yields everywhere went up. Government bond yields everywhere went up, meaning government bonds prices went down. But it was the UK that turned out to be the most sensitive. In other words, yields on the 10-year guilt moved up faster than those of other big developed countries, especially those in Europe. How do we explain that sensitivity?