[MARKET ANALYSIS] Gilts set for a bearish open after Burnham secured a potential route to Parliament, though the path is not plain sailing

The latest UK political development saw the Labour MP for Makerfield announce he is willing to stand aside and spark a by-election, to allow current Greater Manchester Mayor Burnham to run and then, if successful, to challenge for the Labour leadership and, by association, the role of Prime Minister.
Gilts are likely to see a pressured open given the above and ongoing energy upside, we first look to recent lows at 86.14, 85.69 and the contract trough of 85.45. Pressure driven by the ongoing political turmoil and as markets increasingly price in the possibility of a Burnham premiership, a PM fund managers regard as the least market-friendly out of the main contenders, according to the FT. A view driven by Burnham's stance as being to the left of the Labour party and as reports suggest Miliband could be his pick for Chancellor.
From a yield perspective, the 10yr first looks to 5.11% before the 5.13% peak from the 12th of May, which roughly aligns with levels from July 2008. If surpassed, we have the 2008 peak of 5.26% and 5.57% from 2007. For the 30yr, its YTD peak is 5.81%, and if breached, we look to 5.96% from 1998.
The Makerfield seat is not plain sailing. In a 'normal' by-election, given the results in the local elections and recent political momentum, Election Maps calculates that Reform would win the constituency with a majority of some 20pp; Reform on 45% of the vote, Labour just under 25%, and Greens third on just under 14%. Similarly, Britain Predicts has the results at 41% Reform and 28% Labour. Pollster Curtice outlined that if a candidate other than Burnham were running, Labour would have less than a 5% chance of victory. Evidently, the above projections are unlikely to prove accurate as this is not a 'normal' by-election, and so Burnham likely has a better chance than the data suggests; however, the path to victory is undoubtedly a challenging one.
A point that raises a worst-case scenario for the UK government. If Burnham loses the Makerfield by-election, and then they also lose the Greater Manchester Mayoral contest that Burnham stepping down will spark, in addition to the ongoing challenge against PM Starmer. Such an outcome would prevent Burnham from running, and potentially leave the Premiership to a contest between Streeting and Rayner. For reference, Rayner was in second place in the FT's survey of fund managers as to the least market-friendly option, behind Burnham; so any relief in UK assets from the door to Burnham closing may prove limited.
We now await details on a number of points. The timing of the by-election, which is not likely to occur for several weeks; Politico reports that the earliest possible date is June 18th, the same week as a G7 summit in France. If the NEC blocks Burnham from running, given the financial costs of running a Mayoral election or, more pertinently, the political risks of elections now, as outlined above; Starmer has indicated he will not prevent Burnham from running. Does Chancellor Reeves remain in place during a contest and would, as Mail on Sunday's Hodges scooped, the leading candidates commit to retaining Reeves for a period of time for the purposes of market stability. Who the other candidates are: Streeting is seemingly waiting for Burnham to be eligible before sparking a contest; Rayner remains a possibility, though she appears to be in the Burnham camp; Miliband implied he would only run as a placeholder for Burnham; Carns is an outlier, but still worth watching.
Additionally, and related to the last point above, does Starmer contest in a leadership contest or not. He has been clear that he would fight in recent days; however, some of the reporting around this has implied/leaned towards it being more so he can attempt to engineer his own roadmap for standing down, rather than being forced i.e. the Wickham or Peston reporting.