British markets take Healey's first budget in their stride

By Samuel Indyk and Johann M Cherian

LONDON, Oct 28 (Reuters) - UK markets took finance minister John Healey's first budget in their stride on Wednesday, taking comfort from the pledge to stick to the government's borrowing rules.

Borrowing costs globally have hit multi-year highs recently and financial markets had been looking for reassurances from Britain's new finance minister that he would adhere to fiscal discipline.

Healey said the headroom — the amount of extra spending or tax cuts the government can make under its own fiscal — stood at £15 billion ($19.93 billion), in line with expectations from a Reuters poll, but below the £23.6 billion in March. 

Britain's 10-year government bond yield was down 2 basis points on the day at around 5.32%, while the 30-year yield was down 3.5 bps at around 5.71%, as prices rose.

"The bond market is calling it a very boring budget - yields a couple of basis points lower at the long end and virtually unchanged elsewhere. So nothing that's going to change the fiscal picture for the UK significantly," said Kathleen Brooks, research director at XTB.

"Even though we're borrowing more nominally, it's not having an impact on markets and it's not a worry for investors. The reason why is because the government is capitalising on the better growth forecasts," she said.

Inflation and high government borrowing have been key worries for global bond investors, with Britain particularly affected by higher energy costs due to its heavy reliance on imported natural gas, which hit a four-year high of €100 per MWh on Wednesday.

A low-key budget could therefore be welcome news for investors in British assets, who are still haunted by the 2022 mini-budget of former Prime Minister Liz Truss that led to a bond market meltdown, triggered by unfunded tax cuts.

"The whole part of this today was to really avoid a Liz Truss moment," said Mike Bell, head of market strategy at BlueBay Asset Management. 

"He's (Healey) been successful -- the headroom came in almost exactly in line with expectations. It doesn't give investors in gilts anything to panic about in the near term, which of course was the goal today."

Britain's pound was down 0.1% to $1.3295. It fell 0.2% against the euro , which traded at 83.73 pence.  

Investors can now turn their attention towards the Bank of England's meeting next week, at which policymakers are expected to raise interest rates by a quarter of a percentage point to 4%, in the face of rising consumer inflation, which hit 11-month highs last month of 3.5%, adding to the case for a rate hike. 

STOCKS SHRUG, BANKS RELIEVED

The blue-chip FTSE 100 index was up 0.1%, broadly in line with other major European stock markets. The FTSE 250, which generates a greater proportion of its revenue domestically, was down 0.2%.

Britain's biggest lenders welcomed a smaller-than-feared tax hike via an increase on the surcharge they pay on their profits above a set threshold from 3% to 6%. This partially reverses a cut from 8% three years ago under then-Conservative Prime Minister Rishi Sunak. 

Shares in Lloyds, Barclays and NatWest were up between 1.3% and 1.6%. 

"The additional surcharge represents a modest and temporary earnings headwind rather than a fundamental change to the investment case for the sector," said Gary Greenwood, equity research analyst at Shore Capital. 

Britain's biggest lenders have reported bumper profits in recent years, fuelled by higher interest rates since 2022, which have boosted lending income. 

($1 = 0.7527 pounds)

(Reporting by Samuel Indyk, Dhara Ranasinghe and Johann Cherian; Editing by Amanda Cooper and Dhara Ranasinghe)