Reports point to Shabana Mahmood as next UK chancellor

• Unconfirmed media reports indicated Home Secretary Shabana Mahmood will be named UK chancellor by incoming Prime Minister Andy Burnham.
• The yield on the 10-year gilt fell to 4.925% from an eight-week peak of 5.047% as UK bonds outperformed European peers.
• Sterling rose to a one-year high against the euro at 0.8453 pounds.
• Investors viewed Mahmood as a more market-friendly choice than Ed Miliband, who had been expected to favor larger spending and stronger environmental regulations.
• Some analysts cautioned that Mahmood’s economic views are not well established and her influence over Burnham’s fiscal strategy remains uncertain.

Gilts rally, sterling hits one-year high against euro

Unconfirmed media reports indicated that Burnham has selected Mahmood for the Treasury role, easing concerns that he could pick Ed Miliband, who market participants said favors bigger spending and tighter environmental rules that could restrict growth in energy and artificial intelligence.

Burnham, who secured support from as many as 349 Labour lawmakers following the resignation of Prime Minister Keir Starmer, is expected to take office Monday and name his cabinet in the coming days. His team has not officially confirmed Mahmood’s appointment.

UK government bonds rallied Wednesday on the reports. The 10-year gilt yield fell to 4.925% from an eight-week peak of 5.047%, according to Tradeweb data, and UK bonds outperformed their European peers across the curve. Sterling rose to a one-year high against the euro at 0.8453 pounds, later trading at 0.8477, according to LSEG data.

“Market participants have feared that Miliband would go for big-spending and strong environmental regulations that could cap U.K. growth in some key sectors like energy and AI,” said James Rossiter, a macroeconomist at TD Securities, in a note. Pierre Roke, a global capital market analyst at Validus Risk Management, said in a note that Mahmood is “likely to be seen as a more responsible choice than other frontrunners, including Ed Miliband,” and that her appointment would reassure investors that “spending restraint and fiscal credibility will remain priorities.” Rossiter described Mahmood as a more right-leaning candidate who “would likely be more market-sensitive.”

Several analysts cautioned against concluding that borrowing will be contained under the incoming government. Patrick Munnelly, a market strategist at Tickmill Group, said Mahmood’s economic views are “not well established” given that her government experience has been outside the Treasury brief. “Markets like the optics, but there is not yet much policy substance,” Munnelly said in a note.

Roke said investors will watch Mahmood’s stance on public spending and “how much influence she will have over Burnham.” RBC Capital Markets strategists said in a note that if Mahmood is confirmed as Treasury chief, it should calm UK political concerns in the near term.