Picture by Lauren Hurley / No 10 Downing Street
The Prime Minister has defended his bond market comments with borrowing costs at a 19-year high before the Budget.
Prime Minister Andy Burnham has repeated his claim that Britain should not be "in hock" to the bond markets, a line that has moved gilts and the pound twice already this year.
The call doesn't help pound sterling on a day it is coming under renewed weakness: the Pound to Dollar exchange rate trades at 1.3267 (-0.50%) and the Pound to Euro rate at 1.1643 (-0.15%).
"The point about the bond markets, it holds," says Burnham in an interview with the New Statesman, referencing his often quoted "in hock" comment, adding that the country has left itself over-exposed.
The comments also come at a time when bond markets are under historical pressure: last week saw the cost of long-term government borrowing rise to its highest level in 19 years.
Twice Burned
Burnham first said politicians had to get beyond being "in hock to the bond markets" as mayor of Greater Manchester, a remark that lifted gilt yields and knocked the pound until he ruled out any change to the fiscal rules.
The pound recovered once that commitment was made in May.
On his first day in Downing Street in July he said he would use "any flexibility" within the existing fiscal rules.
The ten-year gilt yield rose from 4.98% to 5.04% in the minutes that followed, GBP/USD fell from 1.3450 to 1.3415 and GBP/EUR gave up a daily advance.
"It's a reminder that the market is nervous and will be very unforgiving when it comes to fiscal profligacy," Pound Sterling Live wrote at the time.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
The Timing Is Worse Now
August borrowing came in at £18.3bn, some £3.5bn above the Office for Budget Responsibility forecast, and higher debt costs are estimated to have halved Chancellor John Healey's fiscal headroom to around £12bn.
The Times reports Labour is expected to raise taxes to fill a gap of about £10bn.
Pound Sterling Live reported on Tuesday that Burnham is planning a tax giveaway at the 28 October Budget.
A giveaway funded by borrowing, announced by a Prime Minister who questions the bond market's hold over policy, is the combination gilt investors have been positioning against.
The OECD meanwhile cut its 2027 UK growth forecast to 1.0% on Wednesday, citing the drag from higher interest rates.
Analysts Are Already Positioned
In light of building risks, Deutsche Bank turned seller of sterling this week.
"We have turned bearish on sterling as the risk premium around UK fiscal policy has largely disappeared, leaving the pound more exposed to a softer domestic and external backdrop," says a Deutsche Bank strategy note.
HSBC has chosen the pound as the currency through which to express dollar upside over the coming month.
"We choose to play USD upside against GBP which looks exposed over the next month," says Daragh Maher, Senior FX Strategist at HSBC.
Brown Brothers Harriman says a tighter fiscal squeeze means the Bank of England may not need to raise rates as far as the 100 basis points markets price, leaving the pound vulnerable to a dovish repricing.
Liverpool Next
Burnham will use his party conference speech next week to set out his vision before a ten-year plan for Britain expected before the end of the year.
"We don't have sufficient control of our destiny and that theme will come through in what I say in Liverpool," says Burnham.
That speech lands a month before the Budget and gives the gilt market its next opportunity to price what the ten-year plan will cost, with the pound taking its direction from the response.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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