UK Seventh PM in Decade: Market Risk From Political Turmoil

The chaos traces back to 1990, when Margaret Thatcher was forced out by her own MPs – the first time in living memory a sitting prime minister had been ousted that way. Her successor John Major won the next election anyway. Conservative MPs learned that replacing a leader could keep them in power. Labour learned the same lesson after Tony Blair was pushed out in 2007. Now Starmer is out after his MPs identified Andy Burnham, the mayor of Greater Manchester, as a more electable alternative.

Burnham looks set to succeed Starmer unopposed. He has not said what he would do in the job. He has a reputation for telling people what they want to hear while avoiding tough decisions. That is the risk for fixed-income markets. Britain's benefits bill is spiralling. The Treasury depends on the top 1% of earners for 26% of income tax. Average earners are more lightly taxed than they have been in 60 years. Starmer’s attempt to tackle the benefits bill was blocked by his own MPs. Hard choices keep being deferred.

The Truss episode showed how fast bond markets can impose discipline. Gilts sold off, sterling crashed, pension funds nearly collapsed. A new leader who does not address the fiscal arithmetic could spook markets again. Yet British voters have accepted hard medicine before. In 2010, David Cameron told them the public finances needed repair, and they backed him. In 1979, Margaret Thatcher told them inflation and the unions needed taming, and they backed her. Honesty about trade-offs has historically stabilised the gilt market.

Burnham will take over without a detailed policy platform. The portents for change are not encouraging. The market reaction will depend on his first moves. If he levels with voters about the fiscal gap, yields could fall. If he prevaricates, the risk stays elevated. The first concrete marker is his initial budget, likely in the fall. Investors will watch for specific plans on benefits, taxes, and spending. Until then, gilts and sterling carry a political risk premium that may not fade quickly.