- UK borrowing costs rise after Burnham's remarks
- Investors watching for finance minister pick
- UK already grappling with high public debt, above target inflation
LONDON, July 20 (Reuters) - Benchmark British borrowing costs rose and sterling dipped on Monday as investors fretted over whether Andy Burnham's early remarks on becoming prime minister suggested he would adopt a looser fiscal policy and awaited his choice of finance minister.
Burnham, Britain's seventh prime minister in a decade, faces an array of challenges in his new role — from a sluggish economy to worries about fiscal discipline and the fallout from the Iran war.
He said on Monday he would stick to the previous government's fiscal rules although he would use any flexibility within them.
He also said he was looking at increasing tax-free thresholds for paying income tax and promised to use some of his "political capital" to tackle Britain's social care crisis.
Prices of British government bonds, or gilts, extended their earlier fall after his remarks, sending Britain's benchmark 10-year gilt yield up 9 basis points on the day to 5.04%.
The equivalent German and U.S. yields rose 2 and 4 bps respectively. ,
"We had a bit of a reaction from the market, and I think it was this headline about him (Burnham) being willing to use any flexibility within the fiscal rules," Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said.
"The market is sensitive to any specific thing (announcement) that has the fiscal rules in it."
Britain's 30-year yield, sensitive to longer-term borrowing pressures, rose 9 bps to 5.75%, its highest in two months.
Sterling dipped slightly after the remarks. It was last down 0.27% on the dollar at $1.3416 and also gave back earlier gains on the euro to trade flat on the day at 85.04 pence to the common currency.
INVESTORS ARE NERVOUS
British yields are already the highest in the G7 group of advanced economies, and 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.
And investors remain nervous about the new administration's plans.
"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, speaking earlier on Monday.
Blackbourn said that he had favoured gilts before Burnham won a seat in parliament last month, propelling the former Greater Manchester mayor towards becoming prime minister, but that 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 further clues about Burnham's policy platform on Monday from his choice of finance minister, known in Britain as the chancellor.
Reports last week that he would likely pick Shabana Mahmood, regarded as a centrist, as his finance minister rather than a more left-leaning candidate supported British assets, as markets took the likely choice as a signal that Burnham did 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 the commitments of his predecessor, Keir Starmer, 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."
Reporting by Sophie Kiderlin, Yoruk Bahceli and Naomi Rovnick and Alun John; Editing Susan Fenton and Hugh Lawson
Source: Reuters