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New UK Chancellor John Healey Faces Bond Market and Defense Tests
Andy Burnham named John Healey chancellor. Gilt yields fell Tuesday after a month-long rise signaled market caution. Healey balances spending promises with fiscal discipline.
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Andy Burnham became the United Kingdom's seventh prime minister in a decade this week, and investors are now focused on John Healey, named Chancellor of the Exchequer late Monday. Healey, who resigned as defense secretary under Keir Starmer over what he called the government's unwillingness to commit resources to national security, now faces two immediate tests: delivering Burnham's domestic agenda and keeping bond markets calm.
Gilt yields fell across the curve Tuesday morning, a provisional sign of market approval. The benchmark 10-year yield was lower by several basis points, and the 30-year yield eased as well. That session followed a volatile stretch. Over the past month, the 10-year yield has risen roughly 19 basis points and the 30-year yield about 21 basis points, with both seeing choppy trade. Some of that move reflects the economic effects of the Iran war, which has lifted borrowing costs across most major economies. UK yields continue to trade at a substantial premium to G7 peers.
George Godber, who manages the £781 million Polar Capital UK Value Opportunities Fund, told CNBC's "Squawk Box Europe" that "you can attribute quite a lot" of the recent gilt move to Burnham. "Gilts have moved 50 basis points in the last month. That's costing the average household £80 more on a mortgage, and so the saving on the utility bill is pretty small," Godber said. His fund has taken the view that Burnham is likely to be left of Starmer, which implies higher tax and lower growth, a tough combination for rate-sensitive parts of the economy.
Godber also argued that the bond market itself would restrain any overly ambitious spending. "Have a look at the intraday move in the gilt market yesterday. The moment Burnham used the words 'we will be flexible on the fiscal rules,' gilts reacted. The gilt market will control their policy. When you're £3 trillion in debt, it is your lenders who dictate your policy."