Image: Andy Burnham, source: Labour Party, Copyright: Pound Sterling Live.
Burnham's spending pledges push gilt yields higher as the pound gives back its early gains.
The British pound relinquished the day's gains as Prime Minister Andy Burnham set out a raft of costly commitments in his first conference speech, with UK bond yields rising in response.
The pound-to-euro exchange rate trades at 1.1649, having surrendered a morning rise to 1.1667, and the pound-to-dollar rate is lower at 1.3212.
Burnham told the Labour Party conference in Liverpool he will create a new National Care Service, free at the point of use.
He also pledged to lift the ban on public ownership of water companies, build council homes at scale and bring UK energy prices into line with Europe's.
The spending commitments are immense, and the policies are distinctly left-leaning in nature.
To help pay for them, Burnham announced the end of the state pension triple lock.
From 2030-31, the state pension would rise with inflation or 2.5% each year, dropping the annual link to earnings that has pushed pension spending steadily higher since 2011.
Pound Sterling Live's view is that the market reaction would have been very unfriendly without the triple lock announcement.
The Institute for Fiscal Studies welcomes the change as much improved, but says it is not enough to fund universal social care.
Gilts rallied in the run-up to the speech as reports of the pension change circulated, with the two-year yield falling 13 basis points.
"Bond investors will like the direction. Anything that bends Britain's long-term spending curve downwards is exactly what gilt buyers have been demanding for years," says Nigel Green, CEO of deVere Group.
Above: GBP/EUR at five-minute intervals on Tuesday.
"The problem is every pound clawed back from pensioners is already spoken for," he adds.
Timing is the issue, with the savings arriving slowly over decades and the care costs arriving the day the service opens.
"If the new spending arrives years before the savings, Britain borrows the difference, and the bond market charges for it," says Green.
Yields Turn Higher
The ten-year gilt yield fell to 5.35% ahead of the speech and then climbed to 5.43% as Burnham's plans unfolded.
That pick-up is something of a warning sign; a little indigestion.
Rising gilt yields typically support the pound, but this morning's leader flagged that at times of fiscal concern the two part direction: yields rise and sterling falls.
Above: UK ten-year bond yields at 30-minute intervals, with the start of Burnham's speech marked.
Tuesday's price action fits that pattern, with yields higher and the pound flat.
"Bond markets are staying wary despite signs the Burnham administration will take bold steps to rethink government spending priorities by axing the triple lock for the State pension," says Susannah Streeter, Chief Investment Strategist at Wealth Club.
Water is the second concern for bond investors.
"Nationalisation means buying out owners and absorbing sizeable debts," says Green.
Streeter says investors are digesting the government's willingness to remove the ban on public ownership of water companies, which could pave the way for a raft of renationalisations.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Not all analysts see a fiscal threat in the speech.
"His willingness to accept the fiscal constraints and grapple with the root causes of the cost of living and some of the costs of doing business is encouraging," says Andrew Wishart, Senior UK Economist at Berenberg.
Wishart points to the absence of new subsidies or tax cuts as evidence that Burnham is serious about respecting budgetary constraints.
He nevertheless doubts the triple lock change will do the job asked of it.
"This relatively minor adjustment will restrain spending on state pensions a little in the long run, but surely not by enough to fund a new Social Care Service, free at the point of use like the NHS," says Wishart.
Berenberg expects the Bank of England to hike only once, in November, against the four hikes priced by markets, which would support a partial reversal in gilt yields.
For the pound, a shallower Bank of England hiking cycle removes some of the yield support that has helped it in recent sessions.
Looking ahead, Chancellor John Healey's 28 October budget now has to put Burnham's numbers on the plans.
"Show fully costed care, a credible water plan and rebuilt headroom, and gilts could reward the government's courage with a meaningful rally," says Green.
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Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
