By Yoruk Bahceli

LONDON, June 17 (Reuters) - Franklin Templeton's head of

Europe fixed income bought British government bonds recently and

favours them for the first time in a couple of years in his

portfolios, he said on Wednesday.

David Zahn told Reuters he bought 10-year gilts in late May,

taking advantage of a drop in prices as yields rose above 5% and

touched their highest since 2008.

"It's not massive, but we are long gilts and we think that

you get paid for the risk, but we do think it will be a volatile

ride," he said.

While gilt yields have dropped sharply in recent weeks as

markets priced in a deal to end the Iran war, Zahn said he

expected borrowing costs would rise again as political

uncertainty keeps the market volatile.

Britain has the highest borrowing costs in the Group of

Seven major economies.

If Andy Burnham, the Greater Manchester mayor, wins a ‌local

⁠election in Makerfield on Thursday, he would return to

parliament, becoming the frontrunner in any challenge to Prime

Minister Keir Starmer.

Zahn said the immediate reaction to the by-election result

would depend on how large Burnham's win is and how Starmer

reacts.

While Burnham has said he'll stick to Britain's fiscal rules

limiting borrowing, Zahn said he was still worried they wouldn't

be adhered to.

"I'm just trying to square up how you don't cut benefits,

you keep the fiscal rules, you don't raise taxes, you spend more

on defence, and you spend on his projects that he wants to do,"

said Zahn. "If you add it all up, all five things can't be

true."