Gilt yields soar as Burnham gears up to challenge Starmer

Gilt yields rose slightly on Friday as U.K Prime Minister Keir Starmer faces a challenge to his leadership from a Labour Party rival.

Andy Burnham, the current Manchester mayor, is expected to contest a special election to parliament that, if he won, would give him the seat needed to challenge Starmer, whose premiership has been under pressure following a disastrous set of local election results last week.

Burnham is seen by the bond market as leaning more to the left — a factor that has sent borrowing costs higher, with investors fearing his premiership could mean more borrowing and higher debt. 

Shortly after 1:50 p.m. in London, the yield on the benchmark 10-year gilt traded more than 17 basis points higher at 5.165%. The 30-year gilt added 19 basis points to 5.840%.

Bond yields and prices move in opposite directions, with traders often commanding higher yields on debt investments when confidence in the government issuing the bonds is shaken.

"Global investors are saying, 'we're not comfortable because we don't know what's happening with the Labour Party,'" Kit Juckes, chief FX strategist at Societe Generale, told CNBC's "Squawk Box Europe" on Friday.

"We thought they had a huge majority, and we thought we knew what they were going to do and that they'd be sensible, and now we don't know anything."

"So sterling is a little bit vulnerable, and gilt markets are still vulnerable."

In September, Burnham said that the U.K government should not be "in hock" to the bond market, which spooked traders and sent yields spiking, before backtracking on the comments. 

Meanwhile, President Donald Trump told reporters on Friday that it will be "tough" for Starmer to survive politically without dealing with immigration issues and energy policy.

Sterling had its fifth consecutive daily decline after a week of political tumult, down 0.46% to $1.3342.

"Andy Burnham represents the biggest threat to the gilt market among the serious Labour contenders because investors will immediately associate his leadership ambitions with heavier state spending, looser fiscal discipline and a greater willingness to test market tolerance on borrowing," said Nigel Green, CEO of financial advisor deVere Group.

"The bond market remains traumatized by the Liz Truss mini-budget crisis. Everyone still remembers how quickly Britain lost credibility once investors believed fiscal discipline had broken down."

Starmer's leadership hangs in the balance after his party's poor performance in the U.K.'s local elections last week led to widespread demands from lawmakers for his resignation.

Wes Streeting, originally seen as the potential frontrunner to replace Starmer, resigned from his role as health secretary on Thursday but stopped short of launching his own leadership challenge.

In his resignation letter, Streeting told Starmer he had "lost confidence" in his leadership and it was "now clear that you will not lead the Labour Party into the next general election".

Starmer's former deputy Angela Rayner said on Thursday that she had been cleared of deliberate wrongdoing over her tax affairs, boosting her prospects for another potential leadership bid.