British Prime Minister Keir Starmer resigned on Monday as leader of the governing Labour Party amid mounting political pressure. At the same time, Andy Burnham, one of the party's most popular figures, announced his candidacy to become the next prime minister and secured the backing of a potential rival.

Starmer said he would step down following increasing political pressure, revealing his decision after a weekend of reflection and after ministers indicated he had been considering what was best for the country.

Speaking to reporters outside 10 Downing Street, Starmer said: "The question my party is asking now is whether I am the best person to lead us into the next general election."

He added: "I have heard the answer from my party's parliamentary group, and I accept that answer in good spirit."

"Every decision I have made has been guided by putting the country I love first. For that reason, I will resign as leader of the Labour Party. I spoke with His Majesty the King this morning and informed him of my decision."

What happens next?

Nominations to choose a new Labour Party leaderand therefore Britain's next prime ministerwill open on July 9.

Starmer said: "I will remain in office as prime minister until the selection process is complete, and I will do everything in my power to ensure an orderly transfer of power."

Andy Burnham, the former Mayor of Manchester, is widely viewed as the frontrunner to succeed Starmer after returning to Parliament following a by-election victory on Sunday. Burnham has previously run for the Labour leadership twice.

Less than two hours after Starmer's announcement, Burnham confirmed that he would seek the party leadership and the office of prime minister.

Burnham said: "Keir has given tremendous service to our country, and I thank him for his leadership and dedication during an extremely difficult period."

He added: "His decision marks the beginning of a transition period, and it is important that the process is conducted in an orderly and responsible manner. I will put myself forward as part of that process."

Former Health Secretary Wes Streeting, who had been expected to mount a leadership challenge, announced his support for Burnham. Streeting resigned from the Health Ministry last month in protest over Starmer's leadership.

It remains unclear whether Burnham will secure the leadership unopposed or face challenges from other Labour MPs.

Growing pressure on Starmer

Starmer's announcement came after days of intense speculation about his political future, with journalists gathering outside government headquarters awaiting clarification.

Junior minister Jackie Smith said earlier that Starmer had been thinking "very deeply" about his future and supported his decision.

The resignation marks a dramatic turn in Starmer's political career after he led Labour to a landslide victory in the 2024 election, ending 14 years of Conservative rule in Britain.

However, both major parties have lost support to the right-wing Reform UK party, which has led opinion polls for more than a year.

Labour also suffered another setback after losing the previously safe seat of Gorton and Denton in Manchester to the Green Party.

Why did Starmer lose popularity?

Starmer's government got off to a turbulent start after introducing an unpopular policy to remove winter fuel payments for millions of pensioners. The measure had not been included in Labour's election manifesto and was later reversed following widespread criticism.

He also abandoned plans to impose inheritance taxes on family farms, while his decision to increase payroll taxes and raise the minimum wage angered parts of the business community.

The government was further damaged by a series of controversies, including the resignation of former Deputy Prime Minister Angela Rayner last year over unpaid property tax liabilities.

Impact on markets

Investors began moving away from long-dated UK government bonds following Starmer's resignation announcement.

Asset managers and investment banks said they would avoid significant portions of the British debt market due to uncertainty surrounding Labour's leadership transition.

Long-term UK government bonds, known as gilts, are particularly sensitive to unexpected changes in government spending plans, and uncertainty over Starmer's successor has made them more vulnerable to volatility.

Jason Borbora-Sheen, portfolio manager at Ninety One, said he does not favor long-dated gilts "because of the uncertainty and greater fiscal sensitivity."

Markets are concerned that a Burnham premiership could lead to higher public spending and a shift toward more left-leaning policies.

In that scenario, investors may demand higher bond yields because of Britain's fragile fiscal position, leading to lower bond prices.

Investment bank Jefferies said it is avoiding long-dated UK government bonds and reducing exposure to sterling, expecting "further volatility" in the coming days.

Bond prices fluctuated sharply on Monday as political developments unfolded.

The yield on the benchmark 10-year UK government bond, which serves as a key measure of government borrowing costs, rose from 4.84% to 4.86% after Starmer announced his resignation.

However, it later fell back to 4.80%, the largest decline in Europe, after Wes Streeting endorsed Burnham, making the leadership contest appear closer to a foregone conclusion.

Mohit Kumar, economist at Jefferies, said: "Markets will closely watch Burnham's choice for Chancellor."

He added: "The concern is that Burnham's policies could be more left-leaning, and if the new Chancellor is not viewed as credible, that could raise concerns about deficits and borrowing."

Mike Bell, Head of Market Strategy at RBC BlueBay, said the firm is positioned for a weaker pound and prefers to "stay on the sidelines" regarding 10-year UK government bonds.

"It would not be surprising to see 10-year yields return to 5% if markets begin to question Burnham's credibility and Britain's fiscal trajectory," he added.

What happened to sterling and UK government bonds after the resignation?

The British pound and UK government bond prices remained under pressure on Monday following Starmer's resignation, which could pave the way for Andy Burnham to become Britain's seventh prime minister in a decade.

Sterling fell 0.27% to $1.3202, while remaining broadly stable against the euro at around 0.867 per euro.

Benchmark 10-year gilt prices were relatively stable, with yields rising one basis point on the day to 4.85%.

UK equity markets were largely unchanged after the announcement. The FTSE 100 slipped slightly, while mid-cap stocks declined around 0.5%.

Attention is now expected to shift toward Burnham's choice for Chancellor, who would succeed Rachel Reeves, whose recent efforts have focused on maintaining bond investors' confidence in Britain's ability to manage its public finances.