Gilt yields rise, sterling drops

Britain’s 30-year yield advanced 9 bps to 5.75%, its highest in two ​months

Benchmark British borrowing costs rose and sterling dipped on Monday ​as investors fretted over whether Andy Burnham’s early remarks on becoming prime minister suggested he would adopt a looser fiscal ‌policy.

Burnham later on Monday named former defence secretary John Healey as finance minister, causing the currency to recover marginally along with bond futures.

Britain’s seventh prime minister in a decade faces an array of challenges in his new role — from a sluggish economy to worries about fiscal discipline and the fallout from the Iran war.

Burnham said on Monday he would ​stick to the previous government’s fiscal rules although he would use any flexibility within them.

He also said he was looking at increasing tax-free ​thresholds for paying income tax and promised to use some of his “political capital” to tackle Britain’s social care crisis.

Prices ⁠of British government bonds, or gilts, extended their earlier fall after his remarks, sending Britain’s benchmark 10-year gilt yield up 8 basis points ​on the day to 5.04%.

We had a bit of a reaction from the market, and ​I think it was this headline about him being willing to use any flexibility within the fiscal rules, Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said.

The market is sensitive to any specific thing that has the fiscal rules in it, Gomez-Liechti said.

Britain’s 30-year yield, sensitive to longer-term borrowing pressures, advanced 9 bps to 5.75%, its highest in two ​months.

Sterling dropped after Burnham’s remarks and then marginally rebounded after the announcement of Healey as chancellor a few hours later.

Healey resigned from Keir Starmer’s government over ​the lack of spending on defence that could suggest we may see more spending there, which means more spending overall, but we’ll have to wait and ‌see, said ⁠Nick Rees, head of macro research at Monex Europe. I don’t think anyone in the market has been looking closely at Healey.

Sterling was last down 0.17% on the dollar at $1.3429 and also gave back earlier gains on the euro to trade flat on the day at 85.04 pence to the common currency.