Markets have largely shrugged off Andy Burnham's by-election win in Makerfield this morning, as they wait to see how quickly he moves to topple Sir Keir Starmer and sets out his direction for policy. 

Burnham is all but certain to receive the necessary nominations from 81 Labour MPs to trigger a leadership contest. 

If elected, the Greater Manchester Mayor will likely drag the Government further to the left, increasing taxes and spending and therefore borrowing.

But his plans come at a time when the public finances are already stretched. 

The latest borrowing figures overshot the Office for Budget Responsibility's forecast, reaching £23.3billion in May, higher than the £17.9billion recorded in May 2025.

This morning, there has been a limited impact on bond and currency markets following Burnham's win. 

Borrowing costs inched higher, with 10-year gilt yields 6 basis points higher at 4.82 per cent, while 30-year yields traded up 6 basis points at 5.15 per cent. Sterling dipped 0.08 per cent to $1.32.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: 'The political picture is likely to get messy in the short-term, but concerns around the public finances will endure long after it is resolved.'

While gilt yields have come down in recent weeks as the US and Iran agree a fragile peace deal, borrowing costs are higher than a year ago, and experts expect gilt yields to jump again once Burnham has secured a clearer pathway to Number 10.

Rob Wood, chief UK economist at Pantheon Macroeconomics, forecasts a 9 to 19 basis point increase in gilt yields with borrowing costs likely to remain elevated. 

If Starmer fails to set out a timetable for his departure, leading to a protracted leadership battle over the summer, that could spell further volatility for markets. 

Simon French, chief economist at Panmure Liberum, says that 'such a leadership contest runs a high risk of delivering the winner's curse in the candidate that makes the most generous spending pledges.'

He adds: 'It is highly unlikely that a Gilt market that has already added to the UK excess spread since 2024 would receive this development positively.'

What will a Burnham government look like?

Burnham is unlikely to make his move this weekend, offering investors some breathing space. If successful, however, markets are bracing for further volatility amid questions of economic policy and who he might appoint as Chancellor. 

The expected appointment of a new Chancellor would be the clearest sign of a change in direction of the Government.

His pick will be 'critical in shaping market perceptions,' says Kallum Pickering, chief economist at Peel Hunt. 'A more orthodox figure would limit volatility; a less orthodox appointment would likely widen risk premia.'

Simon French of Panmure Liberum adds that markets 'will be particularly anxious' should Burnham's Chancellor 'be associated with recent UK energy policy, for example Ed Miliband, or its recent labour market and housing policies, for example Angela Rayner'.

The main concern for markets is that Burnham will hike taxes to fund increased public spending. He has consistently argued that work is taxed too heavily and wealth too lightly.

He told Sky News in 2025: 'We've overtaxed people's work and we've undertaxed people's assets and wealth and that balance should be put more right.'

Last year, he said he was in favour of revaluing council tax, which has not been reformed since 1991. He said: 'If that is perceived as a wealth tax, I'm not going to shy away from [that].'

Last September, he drew criticism when he said that the UK needed to get 'beyond this thing of being in hock to the bond markets'.

Burnham has backed away from some expensive fiscal commitments and says he will meet Reeves' fiscal rules, but may come under pressure from Labour MPs to increase welfare spending.

'Sticking to current fiscal rules will be hard given the Government's unpopularity,' says Wood. 'Tax-funded spending increases look likely, as does marginal loosening of the fiscal rules - they have been changed so often in the past it would be remarkable if Mr Burnham left the rules completely unchanged - adding to inflation pressure and the neutral interest rate.'

There is also a risk that Burnham calls a general election to capitalise on the momentum of his win, but further political uncertainty is likely to weigh on investor confidence.