The 10-year gilt yield rose slightly to 4.82 per cent following the news that Labour's Andy Burnham had won the Makerfield by-election, setting the stage for a potential leadership contest.

Burnham's decisive win has fuelled speculation over a potential Labour leadership contest and the future of economic policy, although bond markets have so far reacted relatively calmly to the result.

AJ Bell head of markets, Dan Coatsworth, said the muted response reflected uncertainty over what Burnham's return to Parliament could mean for government policy.

“Andy Burnham’s by-election victory hasn’t fazed bond markets, but this might simply be the calm before the storm,” he stated.

Coatsworth noted that Burnham had recently reaffirmed his commitment to existing fiscal rules and appeared to have moderated earlier comments regarding the influence of bond markets, helping to reassure investors.

As a result, movements in gilt markets remained limited, with the 10-year gilt yield rising marginally to 4.82 per cent and the 30-year gilt yield edging up to 5.52 per cent.

However, Coatsworth warned that political uncertainty could increase if a leadership challenge emerged.

“Investors hate uncertainty, and politics has a habit of making their heads spin,” he added.

The comments came as fresh public finance data showed borrowing reached £23.3bn in May, around 30 per cent higher than the same month last year and above Office for Budget Responsibility (OBR) forecasts.

Quilter Cheviot head of fixed interest research, Richard Carter, said Burnham's return to Westminster had sharpened attention on the UK's fiscal challenges.

“Burnham has achieved his first goal of returning to parliament, with a resounding victory in the Makerfield by-election likely to now propel him to Number 10.

“However, markets await to see just how quickly he looks to strike and ultimately seize the premiership from Keir Starmer, and what his economic plan looks like exactly.”

Carter argued that concerns over borrowing and public spending would continue regardless of any leadership changes.

“Ultimately, none of that is going to change with a Burnham government, and in fact, we could easily see further entrenchment," he continued.

“He has looked to calm market fears with sensible appointments of economic advisers, including the former head of the OBR, but even still, he is going to be challenged fiscally should he become prime minister.”

Meanwhile, AJ Bell head of financial analysis, Danni Hewson, also highlighted the significance of the latest borrowing figures, noting that debt interest payments reached a record £11.7bn in May, accounting for almost half of total borrowing.

“The borrowing figures are a chillingly well-timed reminder to any would-be prime minister that the bond markets matter when a country is carrying as much debt as the UK currently is," Hewson said.

Hewson noted that long-term borrowing costs would likely remain under close scrutiny if a Labour leadership contest develops, although Burnham's commitment to existing fiscal rules had helped prevent a stronger market reaction.

“Whilst the government can’t control external geopolitics, the country needs to be ready to take advantage of any positive momentum and not get caught up in a long, destabilising fight for Number 10,” she added.

“Bond investors like boring and dull - they want someone who has a plan where the maths stacks up, and they stick to it."

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