Key Takeaways
- Bond markets are closely watching the spending plans of Andy Burnham, who was formally appointed UK prime minister on July 20.
- Gilt yields rose after he said he would seek “flexibility” within the existing rules on government spending.
- Bond fund managers have welcomed the appointment of John Healey, though volatility is expected in the runup to the Autumn Budget.
UK government bond prices fell and the pound dipped against the euro and dollar as investors digested the first 24 hours of Andy Burnham’s tenure as prime minister.
Yields on 10-year UK government bonds rose above 5% on Monday and remained above this level on Tuesday following comments from Burnham that he would seek flexibility within the government’s current borrowing rules.
“Neither the bond market, nor the currency reacted well to the headline that Andy Burnham was willing to utilize any flexibility on the fiscal rules,” says Patrick O’Donnell, chief investment strategist at Omnis Investments.
Mike Coop, chief investment officer EMEA at Morningstar Wealth, says that the “early signals from an Andy Burnham government suggest higher taxation, increased public spending and potentially some additional borrowing.” At the same time, he says that market moves were limited because these plans had to some extent been priced in.
Andy Burnham Cuts VAT on Energy Bills
Burnham has made clear his initial focus will be on policies to ease the cost of living. In what is the first test of how his spending plans will be received by markets, the prime minister has already announced the scrapping of VAT on energy bills.
The measure, which will take effect in October, will cost the government around £850 million. Andrew Wishart, senior UK economist at Berenberg, says the small scale of the tax cut and the new chancellor’s commitment to the fiscal rules should comfort bond investors.
Further announcements are expected to follow in the coming days and weeks but the focus will be firmly on the Autumn Budget.
“New money will need to be found, even without new bold or ambitious plans. The timing of the first budget will be important and the gilt market may want it sooner than the new chancellor and Burnham are ready to deliver it,” says James Lynch, investment manager at Aegon Asset Management.
First Budget Under John Healey Comes Into Focus
Despite the initial bond market reaction to Burnham’s early moves as prime minister, fixed income investors have welcomed the appointment of John Healey as chancellor.
Jonathan Raymond, investment manager at Quilter Cheviot, says this is a sign that Burnham will “respect the bond markets.”
“It is vital that any changes made are accompanied by a credible and affordable plan to ensure they support, rather than undermine, long-term economic stability,” adds Raymond.
And Nedgroup Investments head of fixed income, David Roberts, suggests a period of political stability under Burnham would be positive for gilts.
“There are worse outcomes for the gilt market and arguably for UK politics in the short term than Burnham winning and coalescing the Labour Party around him. Stability and two years to convince the electorate, especially if he sticks to the fiscal plan, can see gilts rally further than they already have,” Roberts says.
UK Government Borrowing Figures Underline Chancellor’s Challenges
Government borrowing and jobs data were also released on Tuesday.
Borrowing for June came in better than OBR projections at £16 billion, £7.9 billion less than the same time last year.
Debt interest—which the government pays as income to investors who own gilts—fell £5.3 billion compared with June 2025, though the £11.8 billion of interest paid is still the fourth highest figure for June on record.
“Even with this year-on-year fall, the reality is that there is little room for expensive policy commitments,” adds Quilter Cheviot’s Raymond.
The unemployment rate remained at 4.9% while earnings growth stayed at 3.4%.
