Fund manager sells off ‘fragile’ UK bonds in warning sign for Burnham

One of Britain’s biggest fund managers has dumped government bonds over concerns of an Andy Burnham premiership.Aberdeen Investments, which manages £390bn of client cash, said it had sold down part of its £10bn UK bonds portfolio after Labour suffered a catastrophic local elections defeat.Longer-dated gilts, as UK government bonds are known, are more sensitive to political instability because investors face risks over a longer time horizon. This means they are more likely to react strongly to concerns about a protracted period of instability and demand higher returns.Matt Amis, investment director at Aberdeen, said investors had given successive governments leeway to borrow despite the UK’s record of six prime ministers and eight chancellors over the last decade.He added: “Probably every chancellor in recent history has always been given some kind of room to manoeuvre.“I don’t think this is the case here. I think the gilt market is incredibly fragile given the price of oil and the Strait of Hormuz [remaining closed]. The room for manoeuvre now is close to zero.”The move by Aberdeen came ahead of a week that saw the pound suffer its worst week against the dollar in 18 months and long-term borrowing costs hit their highest level since 1998.Heavy losses in traditional Labour strongholds including Wales reignited questions over Sir Keir Starmer’s future.Wes Streeting resigned as health secretary and Labour’s National Executive Committee cleared the way for Andy Burnham, the Manchester mayor, to fight the Makerfield by-election and return to Westminster.Aberdeen said it had shifted some of its cash into shorter-dated UK debt – which is primarily driven by the outlook for inflation and interest rates – believing a weakening economy would prompt the Bank of England to lower borrowing costs.Guillermo Felices, global investment strategist at PGIM, which oversees $1.5tn in assets, said leadership uncertainty could pile pressure on UK borrowing costs for months.He said: “Bond markets and markets generally hate uncertainty.“The timeframe we’re seeing for the by-election is between six to eight weeks, so essentially that means we’re in a political vacuum for almost two months, and that’s terrible for markets.”Moyeen Islam at Barclays warned the shift in sentiment could be permanent, which would mean adding billions of pounds to the cost of servicing Britain’s near-£3tn debt pile.“It might well be the case that we are transitioning to a higher gilt term premium environment if there are persistent worries over fiscal loosening, structurally higher inflation and underlying political uncertainty,” he said in a note to clients.Energy shares sell-offFears of a Burnham premiership sparked a sell-off in major energy shares and the National Grid last week.Mr Burnham has repeatedly advocated greater state control over housing, transport and energy.However, the Mayor of Manchester has insisted he would not be reckless with the public finances, despite claiming he would not want to be “in hock” to the bond market.Mr Burnham said earlier this year he would never “ignore” borrowing rules even as he called for more public ownership of council housing, social housing and rail renationalisation.Labour MPs have reignited fears that a lurch to the Left would lead to more borrowing, with Paula Barker MP stating last week that markets would “have to fall into line” with a Burnham agenda.However, Nuwan Goonetilleke, chief investment officer at Standard Life, said bond markets would be quick to punish unfunded promises.Mr Goonetilleke said investors and politicians were still feeling bruised from the fallout of Liz Truss’s disastrous mini-Budget in 2022.He added: “All politicians now remember that unfunded free giveaways effectively don’t work.“They know that they’ll be shackled in by the bond market pretty quickly. And ultimately, if you want a very, very short tenure as leader, that’s the way to go.”Mr Goonetilleke said fiscal constraints were unavoidable given the UK’s debt burden and economic outlook. He would be looking at the performance of the pound and the willingness of foreign investors to fund Britain’s deficit.Jane Foley, at Rabobank, added that investors would be wary of any shift in Labour’s fiscal stance.She said: “You would have to judge it to be a very foolish thing to repeat the same mistakes as Liz Truss.“We have such a high level of debt and the fiscal situation in the UK is so tight, there isn’t an awful lot of room to manoeuvre.“It may not take a huge mistake for the gilt market to be spooked.”