UK local election results and the impact for sterling
14 May 2026
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21 May 2026RISK INSIGHTS
Burnham, Bonds and the Battle for Labour’s Future
By Validus | 20 May 2026 | 5 min read
Harry Woolman, Global Capital Markets Associate
Key takeaways:
- UK political instability has returned to the fore, with Labour’s local election losses increasing pressure on Keir Starmer and raising the prospect of another change in Prime Minister
- Andy Burnham’s potential route back to Parliament has unsettled investors, given his perceived openness to looser fiscal policy and greater borrowing
- Long-dated gilt yields have come under pressure, reflecting not only global geopolitical uncertainty but also growing concern over the domestic politics
- With Labour leadership still unresolved, investors should prepare for continued volatility and remain ready to adjust hedging strategies quickly
“A Blairite, a Brownite, a Milibandite and a Corbynite walk into a pub and the barman says, ‘Hello, Mr. Burnham.’” – well-known quip associated with Andy Burnham.
Our note last week highlighted what many had anticipated – massive losses for the Labour Party at the recent local elections. Since then, UK assets have once again been thrown into turmoil, heaping pressure on Prime Minister Sir Keir Starmer and exacerbating the sense of tumult in Westminster.
Long considered a relative bulwark of political stability, the UK is now staring down the barrel of a sixth Prime Minister in 10 years.
From Stability Mandate to Political Fragility
When Labour swept to power in July 2024 with a decisive election victory, many had hoped the substantial majority secured by Starmer’s government would usher in a period of political stability.
However, persistent cost-of-living pressures and anaemic economic growth have seen support for the incumbent government slide since it set foot in Downing Street. Simultaneously, the rise of the political periphery – namely Reform UK under Nigel Farage and the Green Party under Zack Polanski – highlighted growing voter discontent, which was emphatically voiced at the recent local elections.
Labour’s poor performance culminated in four cabinet-level resignations late last week, with former Health Secretary Wes Streeting emerging as the highest-profile dissenter as he prepares to challenge Starmer.
However, these departures were arguably overshadowed by the resignation of Labour backbencher Josh Simons, MP for Makerfield. His departure opened the door for Andy Burnham to contest the seat, potentially giving him a route back into Parliament and, by extension, a pathway to Downing Street.
A Looser Fiscal Turn?
Burnham’s omnipresence in Labour politics over the last 20 years – captured by the joke in this article’s sub-heading – has included two failed leadership bids, alongside a well-regarded tenure as Mayor of Greater Manchester.
His comments last year suggesting the UK has “got to get beyond this thing of being in hock to the bond market” have unnerved investors considering the prospect of his national leadership. Nonetheless, the political hurdle to greater fiscal largesse now appears materially lower after the local elections than under the incumbent Starmer-Reeves administration.
More recently, Burnham floated the idea of an additional £40 billion in borrowing, with supplementary defense spending also falling outside of the scope of any fiscal rules. Coupled with the global bond rout that has unfolded since the Middle East conflict began, this has weighed heavily on long-dated UK gilts.
Last week saw 30-year yields jump 21 basis points to their highest levels this millennium, while 10-year yields also reached post-2008 highs. Indeed, 10-year rates rose by more than 10 basis points last Friday, highlighting the extent to which UK political developments are contributing to longer-term borrowing costs, beyond the impact of geopolitical conflict alone.
For investors, therefore, the concern is not merely political instability. It is the prospect that a post-Starmer Labour leadership could usher in a materially looser fiscal stance.
Chart 1: Brent prices (black line) vs. 10-year UK gilt yields (blue line).
Source: Bloomberg, as of 18th May 2026.
What Investors Should Watch Next
Among the electorate, Andy Burnham is currently the only senior Labour figure with a net positive approval rating according to YouGov polling data. That bodes well ahead of the Makerfield by-election in June, although the outcome is far from a foregone conclusion.
Reform UK performed strongly in the constituency at the local elections, while the rising Green Party could dilute left-leaning support for Burnham. At the national level, Wes Streeting has also declared his intention to run in any future leadership contest.
Stringent internal party rules mean a running candidate must secure the backing of 20% of sitting MPs - 81 out of 403 - as well as approval from the National Executive Committee and powerful trade unions, the latter providing two-thirds of overall party funding. While more than 81 Labour MPs have reportedly called for Starmer’s resignation, that support has yet to consolidate behind a single prospective candidate.
For now, therefore, the base case remains a managed exit for Keir Starmer, with prediction markets pricing roughly a 50% probability of his departure in H1 2026. By year-end, those odds rise to 84%.
Chart 2: Time series of probability of Keir Starmer leaving office by year-end.
Source: Polymarket.com, as of 18th May 2026.
If the last decade of British politics is any guide, investors should brace for continued political volatility in the weeks and months ahead. The fragmentation seen across European politics during that period shows little sign of abating, reinforcing the need for investors to remain nimble and ready to adjust hedging strategies at a moment’s notice.