Bond traders warn Burnham risks market turmoil without funding plan

Bond traders have issued a stark warning that Prime Minister Andy Burnham risks triggering a market meltdown comparable to the Liz Truss episode unless he presents a credible plan to fund his political agenda. Investors have expressed deep concern over the Prime Minister’s fiscal strategy, particularly ahead of his first Budget next month, arguing that a lack of clarity on how major policies will be paid for is driving borrowing costs to multi-decade highs. The market is demanding explicit commitments to tax rises or spending cuts to demonstrate fiscal responsibility and restore confidence in the UK’s public finances.

The pressure on the government has intensified as UK borrowing costs surged this week amid a global sell-off in government bonds. The yield on 10-year gilts, a key benchmark for the cost of government borrowing, reached its highest level since 2007, while long-term borrowing costs hit their peak since 1998. This spike in interest rates has increased the strain on public finances and raised concerns about the sustainability of the current fiscal path. Despite the turmoil, the Prime Minister refused to rule out increasing borrowing during his first Prime Minister’s Questions on Wednesday, a stance that has further unsettled investors who are seeking reassurance about the government’s commitment to reducing the deficit.

Al Cattermole, a portfolio manager at Swiss private bank Mirabaud, highlighted the industry’s uncertainty regarding the government’s intentions. He warned that a lack of credibility in the spending plan could lead to yield spikes similar to those seen during the Truss episode, which was driven by unfunded fiscal spending. Cattermole noted that while history suggests the government should avoid such scenarios, the current ambiguity is fueling speculation about inevitable tax hikes. He emphasised the need for a balance between credibility, growth, and cost-cutting, stating that if taxes are not raised, the market will question the government’s credibility. He added that the government must demonstrate a clear understanding of how to fund its ambitions to prevent further market instability.

Jim Athey, a portfolio manager at Marlborough Investment, echoed these sentiments, stating that spending cuts are the primary demand from the market. He argued that the government needs to acknowledge that the current trajectory of welfare spending is unsustainable. Athey suggested that recognising this challenge and committing to necessary reductions would provide a significant sentiment boost to investors. The market, he noted, is aware of the fiscal constraints and is waiting for the government to articulate a clear strategy to address them. This call for fiscal discipline is part of a broader demand for transparency and accountability in the government’s economic management.

The rise in borrowing costs has also had tangible effects on the wider economy, with homeowners bracing for steeper mortgage rates. The cost of funding for lenders has hit a three-year high, with five-year swap rates climbing to 4.57 per cent, their highest level since October 2023. Two-year swap rates have also risen to 4.47 per cent, their highest since March, driven partly by escalating geopolitical tensions and rising energy prices. These increases threaten to add fresh pressure on millions of households, as the rates are used by lenders to price mortgage offers. The average two-year fixed mortgage deal stands at 5.59 per cent, while a five-year deal is typically 5.63 per cent, reflecting the broader impact of the bond market sell-off on consumer borrowing costs.

In response to the market concerns, Downing Street has asserted that the Prime Minister and Chancellor John Healey are aligned on meeting the government’s fiscal rules. A government spokesman pointed out that borrowing fell to its lowest level in six years last year and that the UK economy grew at the fastest rate in the G7 in the first half of 2026. The spokesman emphasised that fiscal discipline is the bedrock of economic stability and national security, stating that the government is committed to getting borrowing down and cutting the deficit faster than any other G7 economy between 2025 and 2030. However, these assurances have not yet been sufficient to calm the markets, which remain focused on the specific details of the upcoming Budget and the government’s approach to funding its key policy commitments.