(Bloomberg) — The UK’s government bonds fell after Andy Burnham’s victory in a special election renewed political uncertainty, prompting investors to demand a higher premium to hold the country’s debt.

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While the decline came during a broader global bond selloff on Friday, gilts remain particularly vulnerable to swings until there is greater clarity over the UK’s political direction and fiscal policy. Investors are now in a period of limbo as they wait to see how a likely challenge by Burnham against Prime Minister Keir Starmer will pan out.

“We will see more volatility in gilt yields as we move forward,” said David Zahn, head of European fixed income at Franklin Templeton, on Bloomberg TV. “Markets hate uncertainty so just not knowing what’s happening will be difficult.”

Yields on 10-year gilts rose nine basis points to a one-week high at 4.84%, underperforming European peers. Global bonds took a hit as the US and Iran postponed the start of negotiations over a permanent peace deal.

Longer-term UK yields, already inflated by the war in Iran, hit the highest since 1998 last month after Burnham said he intended to run for Parliament. His win in Makerfield in northern England enables him to challenge Starmer, who responded by saying he will stand in any leadership contest — increasing the prospect of a drawn-out bout of political instability this summer.

The win “had largely been factored into market pricing ahead of the event,” said Kallum Pickering, chief economist at Peel Hunt, adding that Burnham will likely be sworn in on Monday as Parliament is not sitting on Friday. “Today and over the weekend, we may be left only to speculate about how any challenge could unfold.”

For the bond market, the key question is the impact on the country’s finances if Burnham becomes prime minister. So far, he has offered little clarity on the potential policies he’d pursue, making it difficult to gauge the ramifications for future borrowing. At a victory rally on Friday, Burnham said the election message was that life needed to be made more affordable.

“Risks are skewed to the downside for financial markets. A shift to a more left-wing agenda without a fresh electoral mandate could trigger negative reactions in gilt and currency markets,” added Peel Hunt’s Pickering.

Burnham has previously criticized the government’s economic approach, claiming the country is “in hock” to the bond market — remarks that caused a market selloff. However, since the Manchester mayor stepped forward to contest the parliamentary seat in Makerfield, he has attempted to draw a line under those comments.

“The message from bond markets has been loud and clear,” said Ella Gude, head of fixed income at BNY Investments Newton, adding that Burnham and his advisers appear to be cognizant of fiscal risks. “I wouldn’t expect any major surprises but to see is to believe.”

Debt Pile

Some gilt investors remain nervous about any potential to ramp up bond sales to fund spending, given the UK is already struggling with its debt pile. Data earlier Friday showed that the budget deficit came in at £23.3 billion ($30.7 billion) after a record interest bill for May, well above economists’ forecasts.

According to the Organisation for Economic Cooperation and Development, national debt is projected to increase to 105.4% of GDP by 2027, up from 98.8% in 2023 — the year before Starmer’s Labour government came to power.

The inflationary impact of higher energy prices has added to pressure on UK borrowing costs, flipping market expectations on Bank of England interest rates from likely cuts to potential hikes. Swaps currently imply one quarter-point hike this year with a 40% chance of a second.

While Starmer and his Chancellor of the Exchequer Rachel Reeves have placated bond investors by adhering closely to self-imposed fiscal rules, any misstep by new leadership could spark a renewed selloff. Unfunded tax cut plans from former Prime Minister Liz Truss in 2022 led to a historic rout and her ouster.

“Gilts have to be fairly low down on any bond investor’s list of longs here,” said Lloyd Harris, head of fixed income at Premier Miton.

–With assistance from Georgia Hall.

(Updates market moves.)