UK government bonds rose on Friday following Andy Burnham's victory in the Makerfield by-election, which has renewed political uncertainty and prompted investors to demand a higher premium to hold the country's debt. According to Bloomberg, 10-year gilt yields rose 0.05 percentage points to 4.81% shortly after market opening, with the move largely similar to changes in European bond values impacted by fresh oil price rises overnight. The decline came despite the fact that the win had largely been factored into market pricing ahead of the event, as noted by Kallum Pickering, chief economist at Peel Hunt. Burnham will likely be sworn in on Monday as Parliament is not sitting on Friday, leaving markets to speculate about how any challenge could unfold over the weekend. Two-year gilt yields rose to their highest since June 12 at 4.25%, up more than 6 basis points on the day and rising around 2 bps more than equivalent German bonds, as reported by Reuters. Longer-term UK yields, already inflated by the war in Iran, hit the highest since 1998 last month after Burnham said he intended to run for Parliament. Bond yields rise when the price of the bond falls, and are a gauge of the cost of issuing new debt. This morning, the yield (or interest rate) on UK 30-year bonds is now up 8 basis points (0.08 of a percentage point) to 5.529%, that's only the highest since Tuesday, and some way below the 27-year high of 5.89% set in May, when borrowing costs were climbing.
The latest official data reveals the scale of fiscal pressure facing the UK government, with borrowing in the financial year so far to May standing at £46.3 billion, which is £8.9 billion – nearly a quarter – more than the same period a year earlier and £7.7 billion more than the forecast by the OBR. According to the Office for National Statistics, borrowing rose by nearly a third (30.4%), or £5.4 billion, compared with a year earlier at £23.3 billion in May, marking the second highest May on record, beaten only during the pandemic era. The impact of Iran war pressures on UK public finances has been laid bare as interest payable on Government debt jumped £4.1 billion to £11.7 billion – the highest ever recorded in any May – as rising Retail Prices Index (RPI) inflation impacted index-linked Government bonds. Spending on debt interest, public services, investment and benefits all increased in May 2026, compared with last May, more than outweighing higher tax receipts. Chief Secretary to the Treasury Lucy Rigby noted that inflation has held steady and unemployment has fallen this week, but the war in the Middle East has clearly had an impact on economies around the world. Government borrowing costs have risen at the fastest pace in Europe on Friday following Burnham's by-election victory, as noted by Reuters.
Wall Street's biggest banks have issued stark warnings about potential fiscal policy changes under a Burnham government. JP Morgan and Goldman Sachs have both told clients they expect the new Makerfield MP to loosen the public purse strings if he succeeds Sir Keir Starmer, despite Burnham's recent promises to maintain fiscal discipline. Allan Monks at JP Morgan stated: "We see a high risk that he would consider a change to the fiscal rules, despite appearing to rule this out in recent weeks." Goldman Sachs warned that a Burnham government would likely face more pressures on government spending, including on defence, public investment and social care. The fiscal rules are seen as crucial to keep bond investors onside, but would severely restrict Burnham's room for manoeuvre. Burnham's electoral victory has set up a potential leadership challenge to Prime Minister Sir Keir Starmer, with the Labour leader responding by saying he will stand in any leadership contest.
The bond market reaction reflects investor concerns over increased political uncertainty and potential policy changes under new leadership. Burnham's electoral victory has set up a potential leadership challenge to Prime Minister Sir Keir Starmer, with the Labour leader responding by saying he will stand in any leadership contest. At a victory rally on Friday, Burnham stated that the election message was that life needed to be made more affordable, though he has offered little clarity on specific policies he'd pursue. As per Bloomberg, risks are skewed to the downside for financial markets as a shift to a more left-wing agenda without a fresh electoral mandate could trigger negative reactions in gilt and currency markets. Chris Beauchamp, chief market analyst at IG, noted that "Burnham's win means a changeover is now all but certain, but questions of policy and the chancellor appointment will be the bigger driver." David Zahn, head of European fixed income at Franklin Templeton, warned on Bloomberg TV that "We will see more volatility in gilt yields as we move forward. Markets hate uncertainty so just not knowing what's happening will be difficult." Neil Wilson, investor strategist at SaxoUK, sees signs that markets are already worrying about the result from Makerfield, because of the uncertainty that naturally surrounds a leadership race and more importantly, a likely crowning of Burnham as PM and leftwards lurch by the government as he is widely seen as the least market friendly option.
The bond market faces additional pressure from deteriorating fiscal projections, with the budget deficit coming in at £23.3 billion after a record interest bill for May, well above economists' forecasts. According to the Organisation for Economic Cooperation and Development, national debt is projected to increase to 105.4% of GDP by 2027, up from 98.8% in 2023 — the year before Starmer's Labour government came to power. Borrowing in the first two months of the financial year was nearly £9 billion higher than the same period of 2025, as noted by ONS senior statistician Tom Davies. Government borrowing for this financial year (since April) is running £7.7bn over the OBR's forecasts – at £46.3bn, raising the risk that borrowing could be higher than forecast by the next budget. The inflationary impact of higher energy prices has added to pressure on UK borrowing costs, with swaps currently implying one quarter-point hike this year with a 40% chance of a second. Some gilt investors remain nervous about any potential to ramp up bond sales to fund spending, given the UK is already struggling with its debt pile. The inflationary impact of higher energy prices has flipped market expectations on Bank of England interest rates from likely cuts to potential hikes, according to Bloomberg.
