Unlikely Partners: Burnham & the Bond Markets

By Tim Thorlby

6 min read

In 2025, Andy Burnham famously complained that the UK should move away from being “in hock to the bond markets”. He didn’t really explain how he would do this, and as he has inched closer to No. 10 as the UK’s next Prime Minister, he has notably softened his rhetoric.

So, what are the bond markets? Can Mr Burnham really avoid being in hock to them? And what are the implications for his premiership? This blog explains what is at stake and some of the big strategic choices our new Prime Minister will have to face.

“We meet at last, Mr Bond (Market)”

The British media often talk about the bond market as though it was a fiendish international Bond Villain. As a global entity which operates with little transparency and appears to wield significant power, it is perhaps not a bad candidate to be a Bond Villain. Do they all sit in big black leather chairs stroking white cats?

This global ‘supervillain’ famously finished off Liz Truss’ short-lived premiership, so it clearly has power. It has been looking over Rachel Reeves’ shoulder for the last two years and even Andy Burnham has been forced to qualify his now-famous complaint about the UK “being in hock to the bond markets”. He now says that he didn’t really mean it quite like that. Cough. Ahem.

Why do the bond markets wield such power? Who are they anyway? Are they really villains …or just misunderstood?

Perhaps it’s time to meet them and find out who they really are. Can Andy Burnham really brush them aside so easily?

Let’s find out.

Let’s visit the bond market. Get your coat.

A Beginner’s Guide to the Bond Market

While we are on the way, a bit of orientation might help those not steeped in the ways of global finance.

Bonds are a central part of the global financial system and of the finances of almost every country on earth. Worldwide, the value of bonds actually outweighs equities (e.g. shares). Not a lot of people know that. In 2024, bonds totalled $145 trillion of assets, against $127 trillion of equities, globally. That’s a lot of money.

If you have a private pension of any kind, it almost certainly includes bonds. So, you are probably – indirectly – a bondholder yourself. Congratulations!

At its simplest, a ‘bond’ is a loan. Many bonds are issued by governments when they need to borrow money, and these are known as ‘sovereign bonds’. In the UK, they are also called ‘gilts’ because they used to be paper certificates with golden (‘gilded’) edges.

Private companies also issue bonds, known as ‘corporate bonds’, although this is a smaller part of the market.

When an investor buys a sovereign bond, they are lending money to the government until the bond matures. This is usually for a fixed period of years and during that term they receive regular payments based on the agreed interest rate for that particular product. At the end of the term, the government repays the money it borrowed. So, it really operates very much like a loan, giving the investor a rate of return along the way. They are traditionally seen as a fairly safe investment because they have fixed rates of return are governments are (usually) rather reliable.

Bonds are often purchased by pension funds, insurance companies and even other governments.

To complicate matters, bonds can also be traded, so are often sold on to other investors. When this happens, the price can also change, so a lot of bond market activity is about this secondary trading. This is worth understanding because this is often what the media is reporting when it talks about “the bond markets”.

The price of a bond, when it changes hands, is determined by the market’s view on both the value of the ongoing interest payments as well as the final sum being repaid on completion. The cost of the bond is the price you pay when you buy it (obviously). The ‘yield’ is a measure of the return to the investor. So, if the price varies, then the yield varies too.

Prices and yields move in opposite directions; when the price rises, the yield falls and vice versa.

So, if you buy a 10 year gilt for £100 at a 4% interest rate, its yield is 4% (this is your return).

If the market price should rise by 5% and you then sell it for that price (£105), the new owner will find themselves with a bond that cost £105 but still with an interest rate of 4%, so its yield drops to 3.8% (i.e. 4%/£105).

You get the idea.

Enough orientation, let’s crack on and get to the bond market.  We may have to get a bus, it’s too far to walk. (It’s what Andy would do, he loves buses).

Can you lend me a fiver? (I mean five billion quid)?

While we are on the way, we need to consider why the UK government keeps borrowing all this money.

In every year since 2001 - so for 25 years on the trot now - the UK government has spent more than it received in income, so has had to borrow money. It mostly does this through sovereign bonds.

So, for the year 2024-2025 the government’s new borrowing for that year was £152 billion,  adding to its total pile of existing debt (the ‘national debt’). At the end of 2024-25 the total national debt stood at approximately £2,800 billion (or £2.8 trillion if you prefer). This is nearly all in bonds.

And, in 2024-25, the same year, the government was paying interest on this pile of national debt, to the tune of £106 billion, which just over 8% of the government’s spending that year. So, for every £1 the UK government spent, 8p was interest payments on sovereign bonds.

There is much we could say about government deficits and national debt but that will have to wait for another blog – here we are focusing on where all of this borrowed money is coming from, and why this matters.

All I would say about government debt at this point is that these figures may not be quite as bad as they seem. The UK government’s annual borrowing is not that different to those of many other advanced economies around the world. Its total national debt is certainly higher than it has been since the 1960s (much of this due to huge borrowing during covid) but it is not unprecedented and is not even close to the levels of borrowing seen during the second world war. Anyway, that’s for another day.

Ah, here we are, we’ve arrived at the bond market! Let’s hop off the bus.

Do you have an appointment?

Today, UK government bonds are issued by the Debt Management Office (DMO), an executive agency of HM Treasury.

Rather disappointingly, the days of good old chaps in bowler hats all jostling each other in a grand hall have gone, so there is not much to see. The DMO is based in a swanky modern office building in Mincing Lane in the City of London. Lots of plate glass and polished marble. And everything is done electronically, including the bond auctions themselves. Yes, you can buy bonds sitting at home in your pyjamas (if you have enough money, of course).

The DMO generally sells bonds through auctions, which are held most weeks. The last auction (at time of writing) was this morning, closing at 10am, selling 4.13% Treasury Gilts to 2033. These were 7 year bonds. Don’t worry if you missed out, there’ll be another auction in a few days.

All sorts of financial institutions buy UK gilts – banks, insurance companies and pension funds. The Bank of England currently owns about 20% of all UK sovereign bonds and some 33% is owned by a range of overseas institutions.

But why are people so afraid of the bond markets? What power do they have?

There is no more potent way to consider the power of bond markets than to summon up the memory of Liz Truss. I’m sorry about this, but we have to do it.

Let’s grab a somewhat overpriced Americano at Saint Espresso, the café below the Debt Management Office, and cast our minds back.

We need to talk about Liz Truss

Yes, yes, I know. Just breathe repeatedly into a paper bag if this bit upsets you.  

It is helpful to ponder what happened to Liz Truss (one of the UK’s worst ever Prime Ministers) if only to learn more about the bond markets which, famously, brought her Premiership to an abrupt end.

James Carville – an American political strategist who helped to mastermind Bill Clinton’s successful 1992 bid for the Presidency and who coined the phrase “It’s the Economy, Stupid!” –  recently said this:

"I used to think that if there was reincarnation, I wanted to come back as the President or the Pope. But now I would want to come back as the bond market. You can intimidate everybody."

Bond markets tend to react to significant political events and world events, if they might impact on a government’s ability to repay money. They are also sensitive to forecasts of inflation; high inflation is a bad thing if you hold a fixed interest bond, as it undermines the real terms value of your income. So, a bond market’s reaction to an event is often less about its expectation of getting its money back and more about whether it thinks inflation may take off again and undermine the value of its bonds – in which case it will want to extract a higher return in consequence.

Shortly after the Trusster became PM, she unveiled her Mini Budget in September 2022, which included her bombshell proposal for £45 billion of tax cuts. She thought this was a stroke of political genius. Unfortunately, she did not really spell out how she was going to pay for it – her Chancellor, Mr Kwarteng suggested that they would probably just borrow a lot more.  

The bond markets panicked – they saw a huge and sudden increase in borrowing, as well as big tax cuts that would fuel inflation ….and so they started selling bonds in unusually high quantities. This caused the price to fall and yields to rise (prices and yields move in opposite directions) causing the biggest rise in yields in a single day, on record.

This meant that the cost for the government to issue new bonds had suddenly gone up – investors were demanding higher interest rates. This would mean higher costs for government, which implied even higher borrowing, a vicious circle.

To turbo-charge the problem, lots of pension funds found that the sudden drop in bond prices fell foul of their own bond holding policies, so they also started to sell, making it worse and turning a retreat into a stampede. For a few days, there was a lot of uncertainty, and growing panic.

Eventually, our hapless Lizzie had to sack her hapless Chancellor and cancel her own budget and then, just five days after the Mini-Budget, the Bank of England had to step in and start buying £65 billion of bonds, in order to restore stability to a falling market and bring the price of bonds back up (and lower the yields). It was really a bail out of the pension funds. The Bank Governor later said that he had feared a full financial market meltdown.

According to the Resolution Foundation, her 45 days in power added approximately £10 billion of new and higher costs in government borrowing due to her decision making. That’s £222 million of extra costs for every day she was in No 10.

Now, I have a few bad days at work from time to time, but I don’t remember ever causing this much mess. After 45 days, Liz “the Human Hand Grenade” Truss stepped down and the significantly duller Rishi Sunak took over.

This story tells us something about the power of the bond markets, but it has wider lessons for us – and Mr Burnham - too.  

So what?

Three points to finish with.

Firstly, the bond markets are a hard reality and cannot simply be ignored. If the UK government wants to borrow lots of private money from private investors, it can’t expect those investors to line up whilst the government simultaneously pokes them in the eye. It’s a business transaction. When government borrows money it needs to give investors confidence that they are going to get their money back on time and not be submerged with high inflation. If not, the price will go up and the Taxpayer will end up with an even bigger bill. So, the ‘bond market’ is mostly not, as it turns out, a villain, it’s just a bunch of investors who want a good, safe investment for your pension. Dull, but true.

So, Mr Burnham can’t just wish the bond markets away, or abolish them, he will continue being in hock to them until he pays off the national debt.

(Unless….he has finally found Jeremy Corbyn’s Magic Money Tree - which I always thought would be on Jeremy’s allotment? Did anyone actually look there?)

Secondly, there is certainly scope to look at reforming how the bond markets themselves work. They have become more volatile in recent years and so finding ways to reduce some of the short-term trading may help to improve their stability from day to day. The Bank of England is looking at this at the moment, in its ponderous way, to try to prevent a Truss-style meltdown happening again. Reform would be a good thing, and lower risks and volatility, but this does not really change the fundamentals of the bond market.

So, thirdly, and most importantly – not only will Andy Burnham have to continue doing business with the bond markets, he may well need to increase government borrowing in the next few years. And if he is going to avoid the same fate as Liz Truss he will need to take some rather bold and difficult decisions.

Nearly everything that Burnham has said so far suggests he wants to spend more public money, not less. He has talked about nationalisation, improving public services and ‘growth in every postcode’. But he will need to pay for it all. I can’t see him being very interested in spending cuts or renewed austerity, and so we are either due for some fairly hefty tax rises, or he is going to have to find a radically new approach to growing the UK economy – baking a bigger national ‘cake’ every year so we can do more and pay off our debts at the same time.

But no UK government in the last thirty years has come close to delivering ‘growth in every post code’. As I have written in previous blogs and as the Resolution Foundation reminded us only this week, little progress has been made in the last 30 years in narrowing the regional divide between London and the rest of the UK – even in Manchester. The scale of investment required tackle these deeply entrenched economic patterns is tens of billions of pounds every year – something no government in my lifetime has ever done.

There is much chatter about ‘Manchesterism’ at the moment as though this is the elusive Magic Sauce that will solve all of our problems. However, as I noted in another recent blog, it is not at all obvious how the city of Manchester’s experience provides a way forward for the national economy. Devolution and more building may be good things, but they are not sufficient for a national economic strategy. Nearly all routes to national progress require more public investment, not less.

Fortunately, the size of our national debt is not what spooks investors - they are happy to lend lots of money to governments, as long as the government has a credible long-term plan that shows how this borrowed money is going to be repaid and how they are going to keep inflation under control. That will require some difficult decisions to be made about public spending, taxes and reforms - all the tricky challenges that recent governments have been straining to avoid.

I have no idea what a Burnham Government will actually do – and I wish him well - but I’m reasonably sure he’s going to be spending a lot more time with those bond markets, not less.

This blog was written by Tim Thorlby. Please sign up if you’d like to know about future blogs, usually published once a month, all free.