Gilt yields eased back this morning. Sterling ticked higher. After the appointment of John Healey as Chancellor, the City exhaled. I would not exhale with it.
Monday told us more about this government than Tuesday morning’s relief rally does. Andy Burnham’s first comments as Prime Minister sent up eight basis points to 5.049% and pushed 30-year borrowing costs to their highest level since late May.
He talked about a “new economic model.” He said he would use “any flexibility” he could find within the fiscal rules. Bond markets do not react that sharply to nothing. They reacted because they heard exactly what he meant.
Then came Healey, and the market decided it could relax. I understand why. A familiar face at Number 11 after a jittery 48 hours reads as stability. But an appointment is not a policy, and Healey’s own record should give investors pause rather than comfort. His defining trait in government was pushing the Treasury for more money as Defence Secretary, a pattern that continued right up until he resigned from Keir Starmer’s administration.
The man who spent years arguing for looser purse strings is now the one holding them. Betting that he will suddenly become the fiscal disciplinarian this government needs is, in my view, a bet built on hope rather than evidence.
Cabinet appointments rarely constrain a Prime Minister who is determined to act, and Burnham has given every indication he intends to act. A Chancellor with a reputation for caution can slow what gets proposed. He is unlikely to stop it, because stopping it was never the job he was given. His job, as I read it, is to make the borrowing more palatable when it lands.
This is the question every gilt investor should be asking themselves right now. Would a Prime Minister who was genuinely committed to fiscal restraint have needed his own Chancellor to calm the market on his second day in office? Healey’s appointment is not evidence that the pressure to spend has disappeared. It is evidence that Burnham understood, within hours of taking the job, that the market needed reassuring while he worked out how far he could push.
Markets have a habit of rewarding a name and a pause rather than an actual policy, and Britain has made that mistake before.
A five-week low in yields and a marginal rally in sterling reflect relief that Monday’s worst-case scenario did not repeat itself. Nothing more than that. Fiscal rules that get described as flexible are fiscal rules that are already being tested in public, and testing them again is only a matter of when, not if.
For anyone holding meaningful exposure to gilts, sterling assets or UK-focused equities, the moment to prepare is now, while conditions are calm, rather than after an autumn statement confirms the debt load has grown further.
Reviewing exposure to gilts, diversifying sterling holdings and stress-testing portfolios against a renewed sell-off are sensible steps to take while markets are quiet rather than reactive.
Until Burnham himself rules out further borrowing dressed up as flexibility, no Chancellor, however experienced or well regarded, can protect this country, or investors’ portfolios, from a Prime Minister whose first instinct in office was to reach for more room to spend.
Gilt investors have given this government the benefit of the doubt for less than a week. Patience like that has a limit, and Burnham and Healey are already testing it.