The Red Sea rules the Red Wall

Three very short and very long weeks ago Keir Starmer, in his first interview after announcing his resignation, warned Andy Burnham that it wouldn’t be possible to spend any less time on diplomacy than he had.

He told the BBC: “If you’re prime minister and you care what bills are going to be like in any household around the country, you have to care about finding a lasting solution to the situation in Ukraine, you have to care about what happens in the Strait of Hormuz. It’s not sensible to think you can just separate these two things out.”

Despite that warning, Burnham’s focus has been entirely domestic — given he has no record of interest in foreign affairs, this is entirely unsurprising. The strategic direction of his premiership seems to be, rather, a re-entering of the country away from London and the South East and towards the rest of the country — for which Manchester plays stand in. But as unwelcome as Banquo’s ghost might have been, he wasn’t wrong: Burnham’s time in office is far more likely to be defined by the relationship between Tehran and Washington than London and Manchester.

This week, for the first time since May, oil hit $100 a barrel. Its price has been rising rapidly for a month after the breakdown of the ceasefire and resumption of hostilities between Iranian and US forces in the region, but rose a further 7.4% after Houthis announced they attacked two Saudi Arabian tankers in the Red Sea.

This attack prompted fears of Yemen’s Iran-aligned Houthi group closing the Bab al-Mandab Strait after they announced a blockade of Saudi ports and ships in the strait, which connects the Red Sea with the Gulf of Aden and the Indian Ocean. Ordinarily it carries around 6% of global oil flows — less than the Strait of Hormuz — but since the closure of the latter, the Bab al-Mandab has become a vitally important route for Saudi oil exports.

The threatened severing of two important waterways for Middle Eastern oil has seen a sell-off of bonds globally, pushing sovereign borrowing costs to levels not seen since before the financial crisis. The average yield on the Bloomberg Global Treasury Index, which tracks investment-grade government debt, has climbed to 3.68 per cent, its highest since 2008, while the index is on course for its steepest monthly decline since March.

Germany’s 10-year Bund yield has reached its highest level since 2011, while the yield on the US 30-year Treasury is hovering just below its highest point since 2007. Japan has also come under sustained pressure: its 40-year government bond yield jumped 10 basis points on Friday to above 4 per cent, and the five-year yield has risen to its highest level since that maturity was introduced in 2000. France’s benchmark 10-year bond yield has touched 4 per cent for the first time since 2009.

In Britain, gilt yields have recorded their longest streak of daily closes above 5 per cent in almost two decades. On Monday, when Burnham became Prime Minister, the yield on the 10-year gilt rose to 5.04 per cent, while the 30-year gilt reached 5.75 per cent. Both are at their highest levels in two months and already the highest among the G7 economies. The Bank of England warned in its annual Financial Stability Report last month that, should energy markets come under renewed strain, there may be “limited scope for previous partial mitigants”, such as the release of countries’ strategic oil reserves, to ease upward pressure on prices.

Burnham has put the cost of living at the forefront of his government, with “Britain better off” the second of his four “themes”. He has learnt apparently nothing from the example of Rishi Sunak, who similarly made halving inflation his key priority — of five despite it being largely out of his power to deliver.

Sunak’s bet was actually a reasonable one. Inflation surged in 2022 as demand for oil and gas rebounded after the Covid pandemic, before rising further when Russia’s invasion of Ukraine sent energy prices sharply higher. Consumer price inflation averaged 10.7 per cent between October and December 2022, meaning the government’s target was to reduce it to 5.3 per cent or below over the same period in 2023. In the event, CPI inflation averaged 4.2 per cent between October and December 2023.

Burnham’s is less so. The Ukraine war has now lasted longer than the First World War, and shows as much sign of swift conclusion as a Wagner opera. The continuing lack of Russian gas and oil forces makes the market much tighter, and therefore particularly sensitive to further shocks. The Iran War ceasefire has broken down, and a flailing Trump is likely to continue attacks — for want of a better plan as much as anything else. The longer the Iranian regime remains undefeated, the more emboldened it becomes. It is a perfectly reasonable strategic calculation that, if the Americans are unable to secure the Strait of Hormuz then they are unlikely to be able to keep the Bab al-Mandab open, either — and that this will put enormous pressure on Trump and what little international support he is still able to claim.

For a country as far in the fiscal hole as Britain, Starmer was right. Burnham has to care about what happens in the Strait of Hormuz. It’s not sensible to think he can just separate these two things out. Andy Burnham might not want to be ruled by the bond market, but until he stops spending their money he has no choice. It’s the Red Sea, as much as the Red Wall, that will define his tenure in No. 10 — and No. 10 North.