Why Britain’s potential next PM is putting investors on edge

LONDON — U.K. gilts and sterling have come under increasing pressure, amid fears a new left-leaning prime minister will challenge the country’s fiscal discipline and take up a confrontational stance towards bond markets.

Investors on Friday were reacting as hurdles were cleared for a challenge to Keir Starmer’s premiership from Labour Party rival Andy Burnham, with selling pressure intensifying.

It came as U.S. President Donald Trump told reporters it will be “tough” for Starmer to survive politically without dealing with the key issues of immigration and energy policy.

Burnham — who is currently the Mayor of Greater Manchester, but not a sitting lawmaker in the U.K. parliament — was offered a fresh pathway to the House of Commons on Friday, which could turbo-charge his route towards 10 Downing Street.

He is set to run in the forthcoming by-election in Makerfield, north-west England, after its MP Josh Simons agreed to step aside and allow Burnham — dubbed Labour’s “King in the North” — to contest the election.

An earlier bid by Burnham to contest a by-election back in January was blocked by Starmer loyalists in an attempt to head off a challenge.

Now, with Starmer under intense pressure to resign after the ruling Labour Party’s disastrous showing in last week’s local council elections, a victory for Burnham in the forthcoming poll over the ascendant right-wing Reform party could strengthen his push for the premiership.

The Manchester mayor last year blasted the U.K. government for “being in hock to the bond markets.”

Traders also fear a more left-wing policy program that would break with the current government’s commitment to fiscal restraint, including £40 billion in additional borrowing for housing and infrastructure spending and higher taxes on expensive homes in London and the south-east of England.

The British pound slumped to a one-month low against the dollar on Friday, continuing its sustained slide over the past week as talk of a challenge to Starmer has gathered momentum.  Sterling was last seen down 0.3% against the greenback in morning dealmaking, trading at $1.3363.

Meanwhile, the yield on 10-year Gilts — the benchmark for U.K. government debt — remains well above 5%, rising more than 1 basis point on Friday to reach 5.137%.

Elias Haddad, global head of markets strategy, foreign exchange at BBH, said a Burnham-led Labour government will likely lead to more spending and borrowing.

“Political…