UK borrowing costs climbed above 5% for the first time since May as US-Iran conflict triggered a global bond sell-off. Ten-year gilt yields rose 0.07 percentage points to 5.04 per cent on Tuesday after US strikes on Iran and Tehran targeting tankers in the Strait of Hormuz. The sell-off puts pressure on Andy Burnham, set to become prime minister on July 20, inheriting a bond market especially sensitive to energy prices.

"For Andy Burnham, every move higher in oil and gas prices is a headache," said Matthew Amis at Aberdeen Investments. Higher yields mean less fiscal headroom and pressure to cushion energy costs. UK yields rose more than European peers, straining an economy with the highest G7 borrowing costs and debt interest exceeding £100bn annually. Investors worry a leftward shift under Burnham could mean more borrowing.

Rachel Reeves is expected to pitch for a senior role in her Mansion House speech but is unlikely to stay chancellor; Ed Miliband is seen as the frontrunner. Mark Dowding at RBC Blue Bay said gilts remain "on the back foot" with risks skewed toward fiscal slippage. Traders now price a quarter-point rate rise by September versus previously the first half of next year. Two-year gilt yields jumped to 4.43%.

Jordan Rochester at Mizuho said pain is focused in UK rates given Burnham taking power and likely Miliband chancellorship. He is shorting 10-year gilts as war resumption and energy flow declines dominate. "Whilst the new chancellor is likely to give warm words of encouragement of sticking to the fiscal rules... markets are very aware the new administration may further down the line be tempted to change the rules," Rochester said.