Bond markets are panicked by Burnham’s Britain

When Andrew Griffith was appointed shadow chancellor on Monday, Labour MPs made much merriment of his involvement in the Liz Truss mini-Budget. Just a day later, Lord O’Neill, Burnham’s economics adviser when he entered No. 10, was pointing out that not since ‘Liz Truss days’ have we seen gilt yields rise as much as they did yesterday.

A global sell-off in bonds due to fears of resurgent inflation and interest rate hikes helped push Britain’s 10-year yield to its highest level since 2008. The 30-year – a good proxy for our country’s long-term viability as a going concern – shot up to 5.85 per cent – its highest since the late 1990s. Those rises continued when markets opened a few moments ago.

Now, while the selling (yields rise as bond prices fall) was hitting money markets all over the place, Britain’s gilt yields rose by more than anywhere else, extending our so-called ‘moron premium’. Part of that is simply catching up from the markets being closed on Monday for the bank holiday, but the trouble for us, as well as the PM and Chancellor, is it also reflects how unstable and uncertain our economic foundations have become.

That said, tempting as it is to think gilt traders are sat watching BBC Parliament and reading Guido Fawkes, their trading decisions reflect much more their view of what will happen with inflation in the months and years to come. And this is the real reason Britain’s gilt markets are getting hammered. Whether it’s employing someone, building a house or powering a factory, you’d struggle to find a country that has made the cost of carrying out economic activity so prohibitive. A toxic sludge of taxes and regulations piled on the supply side of our economy have baked inflation into Britain’s very foundations. That’s the real reason for the moron premium.

That’s not to say fiscal policy and Westminster politics don’t also contribute, and it’s clear that gilt markets are nervous about what they've been hearing from Burnham. Crucially, whatever their motivations for buying and selling, the result creates an almighty headache for John Healey.

Economists at Bloomberg reckon that yesterday’s surging yields wiped out around £12 billion of the £24 billion margin for error against the fiscal rules that Reeves bequeathed her successor. If Healey wants to restore that headroom, then he will have no choice but to raise taxes, cut spending or a combination of both. Even if he wants to avoid that and sit down on 28 October with a reduced buffer, it means a Burnham giveaway spree is most certainly off the table.

The real test comes in the next couple of months, when the Office for Budget Responsibility’s bean counters will choose a ten-working-day window in which to measure yields. Burnham and Healey will both be hoping that things have settled down by then.