The pound fell 0.2% to $1.321, extending losses that have seen the currency decline around 3% since political pressure on Starmer intensified earlier this year.

Investor attention has increasingly shifted toward the possibility of a leadership transition after Andy Burnham, the former mayor of Greater Manchester, returned to Parliament following a decisive electoral victory on Friday, fueling speculation he could emerge as Starmer’s successor.

Market participants said uncertainty over future fiscal policy was becoming a key concern, particularly given Britain’s already fragile public finances and elevated borrowing costs.

“The most important question relates to Mr. Burnham’s approach to fiscal policy, his pick of Chancellor and whether he will stick to the fiscal rules,” Nomura economist George Buckley said.

Britain currently faces the highest medium-term borrowing costs among Group of Seven economies, reflecting a combination of high public debt, rising interest payments, weak economic growth and increasing spending pressures, including defense expenditure.

The options market indicated investors were paying a premium to protect against larger swings in sterling over the coming weeks, suggesting expectations of heightened political and financial market volatility.

Particular attention remains focused on the government bond market. Benchmark gilt yields hovered around 4.85%, close to their highest levels since the global financial crisis, increasing the cost of government borrowing and amplifying investor sensitivity to fiscal developments.

Analysts said the prospect of a new leadership team has prompted scrutiny of whether existing fiscal discipline would be maintained. Burnham has publicly stated that he supports the fiscal framework championed by Finance Minister Rachel Reeves, but investors remain cautious about how future spending commitments would be financed.

“Burnham has said that he would respect fiscal rules. However, it is not obvious where the money for any additional spending will come from,” Jefferies strategist Mohit Kumar said.

Kumar noted that tax levels were already elevated and argued that projected efficiency savings often proved difficult to achieve in practice.

Reflecting those concerns, Jefferies said it remained underweight sterling and continued to avoid longer-dated British government bonds, anticipating further volatility in the gilt market in the days ahead.

The latest market moves underscore investor sensitivity to political developments in Britain, where repeated leadership changes and concerns over long-term fiscal sustainability have contributed to heightened volatility across currency and bond markets since the country’s 2016 vote to leave the European Union.

A sudden government tax decision prompts AXA Investment Managers to reduce UK bond holdings, while several major asset managers continue to see long-term value in British gilts.

AXA Investment Managers has sharply reduced its exposure to UK government bonds after the government confirmed it would not introduce an income tax increase. The move came as financial markets reacted strongly to the unexpected shift in fiscal expectations.

The firm cut its UK bond positions by half in selected portfolios, citing rising uncertainty around upcoming budget plans. The decision reflects broader concerns about the credibility and stability of the government’s fiscal commitments.

Meanwhile, other major asset managers say they still find value in British government bonds despite the policy shift. They expect the Bank of England to move forward with additional interest rate cuts as inflation continues to fall.

Government borrowing costs surged late last week when investors anticipated an income tax hike after remarks made by the finance minister earlier in the month. However, those yields eased slightly on Monday as markets processed the updated fiscal direction.

Large institutional investors had urged the government to strengthen its fiscal buffer to around 20 billion pounds. Many argued that raising income tax was the clearest path to securing that financial margin.

Nicolas Trindade, who oversees global and sterling bond portfolios at AXA Investment Managers, said the firm is taking a more cautious stance heading into the next budget announcement. He noted that the absence of expected tax increases contributes to a more uncertain forward outlook.

Before the policy shift, the firm had been overweight in UK bonds across its global strategy. Trindade said the portfolios are now aligned neutrally with benchmark bond indexes, though he did not disclose specific amounts.

Trindade still believes the finance minister will adhere to established fiscal rules. However, he said the approach now appears less convincing than earlier assumptions suggested.

Without additional tax revenue, he expects the fiscal headroom available to the government will be closer to 15 billion pounds. That figure is below what many investors had hoped would support long-term financial planning.

Other asset managers are viewing the situation differently, emphasising the resilience and relative value of UK gilts. Some analysts argue that bond markets may already be pricing in the effects of recent announcements.

Ben Nicholl of Royal London Asset Management said that the lack of clarity has raised fresh concerns about the government’s ability to deliver on its fiscal promises. Even so, he added that gilts remain appealing compared with other global markets.

Nicholl revealed that he bought additional five-year and thirty-year gilts on Friday. He continues to prefer short-dated bonds, expecting the Bank of England to cut interest rates sooner than markets currently project.

At Allianz Global Investors, portfolio manager Ranjiv Mann said his team continues to favour UK gilts over U.S. Treasuries. Though he has trimmed some positions, he believes most of the positive budget expectations are already reflected in current prices.

Mann acknowledged that skipping an income tax increase may weaken confidence in government policy. Yet he believes officials still intend to follow a strategy of fiscal consolidation in the months ahead.

He noted that recent market movements show investors will pressure the government to maintain discipline. The gilt market, he said, is likely to play a significant role in shaping expectations around future fiscal policy.

Overall, the contrasting positions among asset managers highlight the uncertainty surrounding the UK’s economic direction. While some firms seek caution, others believe falling inflation and potential rate cuts could support gilt performance.

As markets look ahead to the next budget, investors will closely monitor how the government balances credibility, policy clarity, and long-term fiscal responsibility. The coming months are expected to shape momentum in both the UK bond market and broader investor sentiment.