Institution alert! Britain to usher in "Super Thursday" next week: political by-elections may trigger a 3 trillion bond market, British bond "Brexit-style PTSD" reappears.

A voting in a northern constituency far from the London financial district has international bond giants holding their breath. Top global bond investment institutions, including BNP Paribas Asset Management, Neuberger Berman, and Allspring Global Investments, have collectively issued warnings that the by-election for the Makerfield constituency in the UK, scheduled for June 18 (Thursday), may become the "spark" to ignite a new round of intense volatility in the UK's $3 trillion bond market. Political storm intertwined with financial suspense: Starmer's "last stand" The cause of this by-election lies in the disastrous defeat suffered by the Labour Party in the local elections in early May. This defeat not only severely damaged the political credibility of current Prime Minister Keir Starmer but also directly forced the resignation of the former Makerfield constituency MP, paving the way for the return to Parliament of Andy Burnham, a "soft left-wing" star figure within the Labour Party and the current Mayor of Greater Manchester. For the bond market, the risk lies in the possibility that if Burnham wins, he could quickly gather internal opposition forces to directly challenge Starmer's position as Prime Minister and party leader. Although Starmer has publicly stated that he will "fight to the end" and not give up the highest political position, this forthcoming prolonged power struggle, which is set to begin, makes the already fragile financial prospects of the UK even more uncertain. "Barometer" Mayor making it difficult for bond markets to price in, long-term yield rate at historical levels of volatility Faced with a potential new leader who could take up residence at 10 Downing Street, Wall Street analysts feel anxious as the market has almost no knowledge of Burnham's future national economic governance direction. Although Burnham had previously assured investors that he would follow the fiscal framework set by Starmer and his Chancellor Rachel Reeves to avoid debt spiraling out of control, during a television interview last Friday, he unexpectedly refused to detail these fiscal rules. What is more unsettling for hedge fund managers is Burnham's sudden cancellation earlier this month of a scheduled conference call with several long and short strategy bigwigs to discuss fiscal policies and the bond market, in order to focus all his attention on the Makerfield election campaign. "He's like a barometer," bluntly stated James Atsey, portfolio manager at Marlborough Investment Management. "It's difficult to price his policies rationally because he has recently made too many confusing, perplexing, and contradictory statements." Due to this political uncertainty, coupled with turmoil in the global energy market, UK long-term bonds experienced a significant sell-off in May. Previously, the 10-year UK gilt yield rate soared to a high of 5.13%, breaking a historical record in nearly 20 years, and has now dropped to 4.933%; the 30-year UK gilt rate reached a new high in nearly 30 years, and has also seen a slight pullback, standing at 5.617%. Lauren van Biljon, portfolio manager at Allspring, indicated that until there are clear regulations on future borrowing plans, she would need the 30-year UK gilt yield rate to rise to 6% before entering the market. "Buying long-term bonds is difficult, as domestic fiscal issues remain unresolved." Market re-experiencing "Brexit-style PTSD": Bond giants' defense strategies overview The UK macroeconomic fundamentals are also not optimistic. Data shows that the UK government's borrowing in April reached a six-year high, with a budget deficit of 24.3 billion (approximately $32.6 billion). According to the latest forecast from the Organisation for Economic Co-operation and Development (OECD), the UK national debt is expected to continue to swell, rising to 105.4% of GDP by 2027, a figure that is significantly higher than the 98.8% at the beginning of Labour's rule in 2023. Colin Lancaster, co-head of macroeconomic and fixed income free play at Schonfeld Global, mentioned the high levels of suffocation felt before the Makerfield vote, reminiscent of the night of the 2016 UK Brexit referendum. Lancaster said, "Makerfield reminds me of Sunderland (the city that was the first to report 'Leave' in the UK Brexit referendum), it feels like I'm suffering from post-traumatic stress disorder (PTSD). This seems to be another political gamble without a carefully planned strategy, self-inflicted." Facing a potential fiscal black swan event, major entrusted asset management institutions have adjusted their positions in UK bonds. "Super Thursday" resonances: Which other variables cannot be ignored? Of particular concern is that on June 18, international investors will not only closely watch the vote count in Makerfield but will also await the latest interest rate decision from the Bank of England. Although economists generally expect the Bank of England to keep the benchmark interest rate unchanged at this meeting, the recent escalation of the Middle East situation at the beginning of the week, driving up Brent crude oil prices, has intensified imported inflation pressures. Currently, the forward currency market has quietly increased bets on two rate hikes by the Bank of England before the year's end. In addition, bond market analysts warn that the outcome of the Makerfield by-election could take another two extreme paths of evolution: Labour Party unexpectedly losing: If Burnham unexpectedly loses to a candidate from the right-wing populist party Reform UK, the market will sound even greater alarms. This not only means that Nigel Farage's probability of taking Downing Street in future elections increases significantly, but his previously promised radical populist policies like "expanding government influence over the Bank of England" will lead to a disruptive reassessment of the UK's sovereign credit spreads. Burnham withdraws or is defeated: If the Labour Party holds onto the seat but Burnham fails to enter parliament, Starmer's short-term crisis could be alleviated, and UK gilt yields are likely to quickly fall back. But this does not mean an end to the internal strife within the Labour Party, as other potential challengers (such as recent activities by cabinet members) could still pose challenges at any time. On the eve of this "perfect storm" of multiple variables resonating in politics, finance, central bank decisions, and international geopolitical oil, the 3 trillion UK bond market has already erected high defensive sandbags. The late night of next Thursday is destined to be another sleepless night for global fixed income traders.