Bond market analysts are warning of a choppy ride for UK gilts as the Mandelson scandal puts Prime Minister Keir Starmer under pressure, with some speculation that his exit could trigger political turmoil spilling into UK gilts.
The warning comes as pressure mounts after police confirmed a criminal investigation into Mandelson over claims he shared sensitive government information with Jeffrey Epstein while business secretary in 2009.
Investors are concerned that any sudden leadership change could unsettle economic policy and gilt markets, given that Chancellor Rachel Reeves’ credibility is closely tied to Starmer’s authority.
IG chief market analyst Chris Beauchamp says: “The relative calm in UK borrowing costs following the Budget has come to an abrupt end as the PM’s leadership comes under threat. Investors are clearly wary of the consequences of what will follow from Kier’s possible defenestration, given the wide field of leadership candidates from the various sections of the Labour Party. A rerun of the disastrous Truss premiership is unlikely, but a more left-wing leader devoted to higher spending might upset the delicate balance in UK government borrowing markets, leading to higher borrowing costs.”
Nedgroup Investments co-portfolio manager Global Strategic Bond Fund David Roberts says: ”First it was Reeves bashing – how dare she stick to her plan. Gilts reached the giddy heights of 0.6% more yield than US Treasuries; we bought some.
”Next, Reeves stuck to the plan and UK economic performance was almost ideal for government bonds. Gilts rallied; we sold.
“Then, it’s Burnham – a handful of MPs preferring him to Starmer. Gilts wobble mid-January; we weren’t sucked back in. And now, Mandelson – yet another threat to a UK PM with a massive majority. Gilts slide, both in real terms and versus US bonds.
“Meanwhile the UK economy, used to stumbling along, threatens to break into a modest jog. House price data, PMI information, public finances all improving – leaving Gilt buyers in a bind.
“The market appears cheap for the economic outlook. Recent good news stabilises, rather than radically alters, the growth and inflation outlook – which should be positive for the Government, reducing political noise, but reducing the possibility of further rate cuts.
“Buy Gilts because the economy is fine – good enough to offset Downing Street shenanigans? Sell gilts because the numbers are too good – but with the PM on shaky ground that economics alone wont support?
”There’s lots of uncertainty that’s for sure. Thankfully, my global fund can afford to ignore the UK, such a small part of the global bond market. ‘It’s at times like these we see the benefits of geographic diversification.”
deVere Group Nigel Green says: “If the Mandelson affair brings down the Prime Minister, which is something a growing number of commentators are discussing, the consequences would not stop at Downing Street. Markets would immediately focus on the UK bond – or gilt – market.
“Rachel Reeves’ credibility with bond markets has been built on one core thing: continuity. She’s consistently positioned herself as a guardian of fiscal discipline, clear rules, and predictability, particularly after the gilt market turmoil of recent years, especially during the Truss mini-Budget drama.”
“This credibility is derived from the authority of the Prime Minister who empowered her and enforced discipline around the economic message. Investors see Starmer and Reeves as a single framework.”