The British pound experienced a 0.15% rise to $1.3451 after Prime Minister Andy Burnham named John Healey as the UK's new finance minister, marking a recovery from three straight down sessions. According to Citi, the market's focus has shifted from political risk to policy risk, as investors immediately turned to the question of whether fiscal rules will keep gilt markets steady. UK 10-year gilt yields rose above 5.04% yesterday afternoon as investors fretted over Burnham's tax and spending plans, putting the yield over the 5% level that until this spring had not been breached since 2008 - well above the levels seen under Liz Truss. The appointment of Healey, a former defence secretary who resigned last month over military spending concerns, was announced after the close of UK markets on Monday and had not been seen as a leading candidate for the key role. As per Reuters, investors are now watching for fresh signals on the new leadership's fiscal policy under Prime Minister Andy Burnham.
British government bonds, known as gilts, held steady with UK 10-year gilt yields rising above 5.04% after the appointment of finance minister John Healey. As reported by Reuters, gilt yields had jumped 8 basis points above 5% the day before, as Burnham's early remarks that he would use any flexibility within the government's fiscal rules reignited concerns about possible loosening of fiscal policy. Yields on 30-year bonds, more sensitive to fiscal concerns, hit a fresh 2-month high at 5.7621%, up 1.5 basis points. ING currency strategist Francesco Pesole noted that stabilisation in the bond market is needed for the pound to fully regain its strong momentum. According to Citi, the shift from political risk to policy risk matters because investors had pushed borrowing costs up and nudged the pound down when Burnham's early comments sounded like they could open the door to looser public spending. The rise in UK borrowing costs was the fastest in the G7, with Rupert Harrison describing it as 'some early warning signs from the gilt market for Andy Burnham'.
One area of spending in particular focus is defence, where Healey resigned in June from Starmer's government, saying the finance ministry had been "unwilling" to find the money to keep the country safe. According to Reuters, expectations that Healey could find more cash for defence pushed London-listed defence stocks 1.6% higher on Tuesday, outperforming European peers. David Zahn, head of European fixed income at Franklin Templeton, noted that while Healey has some experience in Treasury and is not a far-left Labour Party member, the vision remains Burnham's, and delivering the cash for spending will be challenging. Healey will now be charged with finding the money to fill a hole in the defence budget that Rachel Reeves refused to fill, as reported by Bloomberg Markets Pulse Survey, Healey placed second after Wes Streeting as the preferred Chancellor, ahead of both the early front-runner Ed Miliband and the recent front-runner Shabana Mahmood, suggesting this should be a positive development for investors. Defence stocks were among the biggest risers on the FTSE 100 on Tuesday morning, with Babcock International rising by as much as 7%, BAE Systems up 3%, and Rolls-Royce increasing nearly 2%.
Investors were digesting positive UK economic data that analysts said was supportive for the new finance minister. As reported by Reuters, British annual wage growth held at 3.4% in the three months to May, matching economists' forecasts, while UK public borrowing declined to £16 billion ($21.5 billion) in June, with the Office for National Statistics reporting that public sector net borrowing was £16bn last month, £7.9bn less than in June 2025. The government announced it would cut taxes on electricity bills, as Burnham attempts to deliver on promises to ease the cost-of-living crisis. However, Berenberg economist Andrew Wishart noted that the small scale of the energy bill giveaway, with VAT only charged at 5%, will cost little. According to Citi, the latest data didn't change the picture much, with wage growth holding at 3.4% and June public borrowing falling to £16 billion, helped by stronger tax receipts and lower inflation-linked debt payments. The monthly deficit was smaller than expected in June at £16.0bn versus the consensus expectation of £17.8bn, with downward revisions to previous months' data. However, analysts warned that the disinflationary plans to cut VAT on energy bills and other proposals will need to be funded, adding to market uncertainty.
Despite the positive economic data, investors remain cautious about the new leadership's fiscal approach. As reported by Reuters, Burnham's first comments as Prime Minister hit a raw nerve with investors when he used the word "flexibility" regarding the self-imposed fiscal rules that limit government deficits. While he might stick to the letter of the law, the possibility of stretching fiscal rules to their limits has concerned bond investors. The 10-year gilt yield rose by 8 basis points to 5.03% on Burnham's first afternoon as premier, contrasting with broader increases of 1-2 basis points in European markets. The 30-year yield rose by 9 basis points to 5.74%, approaching the recent peak of 5.84% - the highest level since 1998. According to Citi, this means that every £1bn that the government borrows on a ten-year term leaves it liable to pay around £50m a year in interest. Higher yields and the threat of higher taxes weighed on traditionally rate-sensitive sectors including utilities, housebuilders, real estate companies and domestic retailers. Matt Amis from Aberdeen noted that talk of 'using flexibility in the fiscal rules seems to have got the market's attention', while Mohamed El-Erian from Allianz warned that 'the UK is experiencing the largest move in government bond yields' as the new Prime Minister recommits to existing fiscal rules while seeking flexibility within them. The 10-year gilt yield rose above 5.04% in early trading this morning as markets grapple with disinflationary plans and proposals that will need to be funded, with investors fretting over Mr Burnham's economic plans and what Mr Healey will announce in his first Budget expected this autumn.
