Andy Burnham’s decisive win in the Makerfield by-election may set the stage for a future leadership contest within the UK Labour Party, potentially challenging Prime Minister Keir Starmer’s position. According to a research note from Citi, this development carries meaningful implications for both UK government bonds and equity markets.
Economists generally anticipate that any leadership transition is more likely to unfold later in the summer. However, a faster route to Burnham’s premiership remains a distinct possibility, one that could initially calm gilt markets by reducing immediate political uncertainty. In contrast, a prolonged leadership struggle would likely keep investors focused on the government’s fiscal trajectory, placing additional strain on UK government bonds.
A central question for markets is what Burnham’s potential administration means for public finances. Analysts expect higher government borrowing to become more probable, even if existing fiscal rules remain formally intact. Investors may therefore concentrate on the increased supply of government debt rather than how those funds are allocated.
This dynamic could push 10-year gilt yields back toward recent highs in the 5% to 5.25% range. Political uncertainty combined with concerns over future borrowing levels would make higher yields a likely outcome, with direct consequences for equity valuations across the UK market.
Burnham has provided limited detail regarding his broader economic agenda to date. His previous statements have highlighted support for reforming property taxation and endorsing public ownership of critical industries, including water utilities. These policy leanings, while not fully fleshed out, add another layer of complexity for market participants trying to gauge long-term fiscal direction.
Rising bond yields tend to widen the performance gap between different segments of UK equities. Historically, the domestically oriented FTSE 250 index has shown greater sensitivity to higher interest rates, often underperforming the internationally exposed FTSE 100 during periods of rising yields. This divergence reflects the structural differences in revenue sources and financing costs between the two indices.
Sector performance also follows a predictable pattern in such environments. Real Estate and Utilities have typically struggled when yields rise, while Financials and Energy tend to hold up better. Under this backdrop, banks, basic resources, and healthcare stocks remain among the more favored areas of the market.
Earnings trends further highlight the divergence between large-cap and mid-cap equities. Profit forecasts for the FTSE 250 have declined this year, whereas expectations for the FTSE 100 have improved, largely due to stronger outlooks for energy companies. Large-cap UK equities therefore appear better positioned than their mid-cap counterparts.
Historical sensitivities suggest that if 10-year gilt yields move back toward recent highs, rate-sensitive stocks could face a further decline of 5% to 10%. This risk underscores the importance of monitoring yield movements as a leading indicator for equity performance across the UK market.