Benchmark British borrowing costs edged higher on Monday, though sterling gained slightly, as investors awaited Andy Burnham's first decisions as prime minister including who he will choose as his finance minister.
Burnham, who will be Britain's seventh prime minister in a decade, will face an array of challenges in his new role — from a sluggish economy to worries about fiscal discipline and the fallout from the war in the Middle East.
Yields on British government bonds, or gilts, are the highest in the G7 group of advanced economies, and British 10-year borrowing costs hit an 18-year high in May as the Iran war drove up energy costs.
That underscored fears about inflation around the world, and particularly in Britain where it has long been above target.
High public debt, and the scars of the Liz Truss mini-budget crisis in 2022, have also been weighing on bond prices and keeping yields elevated.
The 10-year yield was last at 4.98%, below its May highs, but up nearly 3 basis points on the day.
And investors remain nervous.
"I can't believe we've gone from this relatively long period of stable leadership to this rapid change of prime minister that gives no one that certainty for the longer term," said Oliver Blackbourn, multi-asset manager at Janus Henderson.
Blackbourn said he had favoured gilts before Burnham won a seat in parliament last month, propelling the then Greater Manchester mayor towards becoming prime minister, but he had cut his position since in case the new top team's policies increased government borrowing.
FINANCE MINISTER CHOICE IN FOCUS
Investors could get some clues about Burnham's policy platform on Monday from his choice of finance minister, known in Britain as the chancellor.
British assets were supported last week by reports that he would likely pick Shabana Mahmood, regarded as a centrist, as his finance minister rather than a more left-leaning candidate, as markets took this as a signal that Burnham does not plan to ramp up spending as some investors had feared.
Though for some investors the choice is somewhat symbolic as Burnham has already said he will stick to his predecessor, Keir Starmer's commitments on taxation and public spending.
"A lot is made about the candidates for chancellorship, but the fundamental point is the government's going to still have to have some commitment to the underlying fiscal rules," said Ranjiv Mann, lead portfolio manager at Allianz Global Investors.
"There (are) certain policy options the government may go for from different candidates, maybe pushing the fiscal rules towards more borrowing to invest on some of these big infrastructure projects."
However, he added, "It’s going to be very difficult for (Burnham) to move from that straitjacket because, as we've seen multiple times now over the last few years, bond investors in the UK will certainly punish the UK government if they don't stick to those rules."
THE POUND HAS BEEN STRENGTHENING
Unlike gilts, Britain's pound has been performing strongly in recent weeks. It has strengthened on the euro for the past four weeks, and on the dollar for the past three, partly helped by the higher yields, and also as the relatively painless political transition caused traders to remove some bets on pound weakness.
It continued to edge firmer on Monday. It was last up 0.13% on the dollar at $1.3469 and, was also stronger on the euro which dropped 0.16% to 84.88 pence.
"I think there's actually quite a lot of good news priced into UK asset prices at the moment," said Andrew Wishart, senior UK economist at Berenberg.
"It's all suggesting that there's belief among investors that the Bank of England is going to hit its inflation target and the government is going to make the public finances sustainable. The big question we've got now with Andy Burnham coming in is are these things going to remain true," he said.
