The yield on 10-year UK government bonds, known as gilts, rose eight basis points to 5.049% at the close of London trading on Monday, reaching its highest level in approximately two months. The move came after Andy Burnham appointed John Healey as the next Chancellor of the Exchequer, a surprise choice that followed speculation that Shabana Mahmood and Ed Miliband were frontrunners.
Market Reaction to Healey's Appointment
The financial markets initially traded steadily after Andy Burnham officially became Prime Minister, but sentiment turned negative during the afternoon. Burnham told reporters he would use “any flexibility” he could find within existing fiscal rules, prompting a selloff in bonds. The value of the pound also slipped by 0.29% to $1.341 against the US dollar, reversing earlier gains. The FTSE 100 index closed 0.71% lower at 10,524.76 points.
Kathleen Brooks, research director at XTB, commented: “Although Burnham has said that all new spending plans will be fully funded, investors want to see it before believing it. It is still unclear exactly what Burnham’s economy policy will look like, which is leading to significant confusion, hence the selloff in the bond market on Monday.”
Fiscal Rules and Economic Outlook
Burnham stated he would “stick to the fiscal rules” agreed by Sir Keir Starmer’s administration and would not be “taking risks with the economy”. However, the new Chancellor faces a challenging economic environment. Growth remains weak, with UK gross domestic product (GDP) growing only 0.1% in May after contracting 0.1% in April. State borrowing is elevated, and national debt is at its highest level since the 1960s, while the labour market faces continued pressure.
Rachel Reeves, who lost the role of chancellor in the reshuffle, had made economic growth a priority but struggled amid the conflict in the Middle East and elevated inflation. Healey will need to digest fresh economic data this week, including inflation and state borrowing figures. Inflation is expected to cool further but may temporarily rise later in the year due to higher household energy bills from July.
Cost-of-Living Support and Fiscal Balance
Burnham has indicated his government is likely to provide further cost-of-living support for households battling rising inflation. Healey must ensure these potential spending measures are adequately funded while balancing state finances to meet fiscal rules. The new Prime Minister has pledged to stick to Labour’s current fiscal rules, helping to allay earlier concerns from bond markets.
