Markets that put Burnham down could be priced out of Starmer, analysts say

Andy Burnham, the front-runner to topple UK Prime Minister Keir Starmer, abruptly withdrew a phone call intended to scare investors about a possible policy shake-up on Monday, the FT reported.

Burnham – who is not yet a member of the UK parliament – will contest a by-election on June 18 in Makerfield, north-west England. If he wins the seat, he is expected to launch a formal challenge to usurp Starmer’s position.

Starmer’s leadership has come under severe pressure following the ruling Labor Party’s crushing defeat in the UK general election.

Political instability and Burnham’s bid to return to Westminster have sent jitters through the UK government bond market in recent weeks, amid expectations that he will be left-wing to Starmer and increase borrowing.

The UK has the highest borrowing costs in the G7, with yields on its long-dated gilts trading above the key 5% threshold.

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Burnham, who last week wrote a proposal to include industries of national importance and tighter regulation of Big Tech and AI, has said in the past that politicians should not “go into the bond markets” – comments for which he was recently convicted.

According to the FT, Burnham was scheduled to take part in a call hosted by political consultancy Signum Global Advisors to discuss a variety of topics, including “balancing changes in monetary policy and pressure on the bond market.”

Sources told this newspaper that the call was canceled shortly before it began, with participants told that it would not be held due to scheduling conflicts.

CNBC has reached out to Signum Global and Burnham’s office for comment.

In an analysis published on Wednesday, financial services firm Ebury said markets were underestimating the outcome of the Makerfield by-election and ongoing political risks.

Ebury’s primary concern, according to the firm’s head of market strategy Matthew Ryan, is that Starmer’s term is coming to an end soon with a formal leadership challenge.

Ryan labeled the market risk posed by Burnham’s victory as “extremely high.”

“Burnham’s victory, in our view, would represent a very significant shift to the left in the context of succession realities, and we would expect the markets to price in the UK’s financial risk well and quickly,” he said.

“His time as mayor perhaps offers a glimpse into his plans at a national level, namely reduced spending, financed by borrowing and increased tax on loans and high earners. The problem is that the UK cannot afford such a check given the thin financial base, rising debt-to-GDP ratio and increasing pressure on population growth due to low GDP.”

Starmer has vowed to continue in his role, despite many members of his party calling for him to step down, but a leadership vote will be put to party members if his challenger receives enough support from sitting politicians.

Predictions platform Polymarket currently ranks Burnham as the next UK Prime Minister, with a 59% chance of taking over in 2026 compared to a 25% chance of Starmer staying in the job for the rest of the year. That puts his perceived chances higher than any other lawyer who has been reported to be running for the top job.

Former deputy prime minister Angela Rayner – also considered to be more left-leaning than Starmer – has been given a 7% chance in Polymarket, while Wes Streeting, who resigned from Starmer’s cabinet last month, has a 1% chance.

Investors in the UK’s sovereign debt, known as gilts, appeared to be strongly supportive of Starmer and his finance minister Rachel Reeves remaining in their roles, given their commitment to controlling public borrowing and spending.

Nigel Green, CEO of consultancy deVere Group, told CNBC in an email on Wednesday that Burnham “has become a proxy for investors’ concerns about UK debt, borrowing and divestment.”

“Among prominent Labor figures, Burnham is widely viewed in financial circles as the candidate most willing to challenge the obstacles that have shaped economic policy in recent years,” he said, noting that the “Liz Truss” episode is still burned into the market’s memory.

In 2022, gilts were sold off when then-Prime Minister Truss tried to withdraw unpaid taxes, prompting an emergency intervention by the Bank of England and eventually leading to his resignation less than two months into office.

“Burnham has moved to stabilize markets in recent weeks, supporting financial regulations and seeking to allay fears that a future government under his leadership will depart too much from the current framework,” Green told CNBC. “But the initial need for those assurances underscores the challenge he faces.”

Daniela Hathorn, senior market analyst at Capital.com, told CNBC that although the markets have started to call for a high probability of a change in the leadership of Labor and a possible victory of Andy Burnham, the goods of the UK do not fully reflect that effect.

“The recent rise in gold yields, weak performance and underperformance in domestically exposed sectors suggest that investors are seeking a higher risk premium due to political uncertainty, rather than making a definitive decision about Burnham’s future administration,” he said. “So to me, it seems like the markets are more responsive to policy changes than to any specific fiscal agenda.”

If investors are convinced that a Burnham-led government is the most likely outcome, the market reaction could be more pronounced, he added.

James Smith, UK economist at ING, said oil prices, not politics, were driving gilts at the moment.

“I think even Andy Burnham is treading carefully now,” he told CNBC in an interview. “I doubt we will get any radical changes in monetary policy this year that will significantly change the Bank of England’s policy.”

– CNBC’s Joseph Wilkins also contributed to this report.