Government borrowing costs lifted higher and the value of the pound weakened amid caution from City traders ahead of John Healey’s appointment as the next Chancellor of the Exchequer.
Andy Burnham appointed the former defence secretary in a surprise move after speculation that Shabana Mahmood and Ed Miliband had been frontrunners for the role.
The appointment followed a largely steady session for the financial markets on Monday after Andy Burnham officially became the next Prime Minister.
However, they took a downturn during the afternoon after Mr Burnham told reporters he would use “any flexibility” he could find within existing fiscal rules.
The yield on 10-year Government bonds, called gilts, moved eight basis points higher to 5.049% at the end of London trading.
It meant the cost of UK state borrowing had risen to its highest level for around two months.
The value of gilts decrease as the yield on them increases.
Meanwhile, the value of the pound slipped by 0.29% to 1.341 against the US dollar, having been positive throughout most of the day’s trading.
The FTSE 100 finished 0.71% lower at 10,524.76 points at the close.
Kathleen Brooks, research director at XTB, said: “Although Burnham has said that all new spending plans will be fully funded, investors want to see it before believing it.
“It is still unclear exactly what Burnham’s economy policy will look like, which is leading to significant confusion, hence the selloff in the bond market on Monday.”
Mr Burnham said he will “stick to the fiscal rules” agreed by Sir Keir Starmer’s administration and added he will not be “taking risks with the economy”.
As the new Prime Minister started to make appointments for his first Cabinet, Rachel Reeves confirmed she had left the role of chancellor.
Mr Healey will be tasked with helping steer the country through a testing economic situation.
Growth remains weak, state borrowing is elevated, the national debt is at its highest level since the 1960s and the labour market faces continued pressure.
Ms Reeves made economic growth a priority during her tenure in the role, but struggled to match these ambitions of accelerating growth amid a backdrop blighted by pressure linked to the conflict in the Middle East and elevated inflation.
Most recently, UK gross domestic product (GDP) grew at 0.1% in May, having contracted by 0.1% in April.
The new Chancellor will have to digest a raft of fresh economic data this week, including the latest UK inflation and state borrowing figures.
Inflation is expected to cool further but this is likely to be temporary, with higher household energy bills from July likely to contribute to a fresh uptick in inflation later this year.
Mr Burnham has already indicated that his Government is likely to provide further cost-of-living support for households battling rising inflation.
Nevertheless, the Chancellor will have to ensure they can adequately fund these potential spending measures while balancing the state finances in order to meet the fiscal rules.
The new Prime Minister has pledged to stick to Labour’s current fiscal rules, helping to allay earlier concerns from the bond markets.
