London: UK bonds posted some of their biggest gains on record as investors bet incoming Prime Minister Rishi Sunak will turn the page on weeks of turmoil dogging the nation’s markets and restore credibility to economic policy making. Short-dated notes led the rally with the two-year yield falling by the most since 1993 after Sunak – a former chancellor who had issued a warning over Liz Truss’ “fairytale” tax cuts – emerged as the winner in the race to succeed her. The gains were supercharged as traders pared bets on future rate hikes.
Truss resigned last Thursday following a market meltdown that pushed yields to their highest in years, forced the central bank to step in to stabilise markets and eventually prompted her to backtrack on plans for vast fiscal stimulus. Investors expect Sunak will draw a line under the economic damage.
“For now, it’s relief that ‘total chaos’ is over,” said Marc Ostwald, chief economist and global strategist at ADM Investor Services Int. “His credit with markets comes from having been a steady hand as chancellor and being a polished communicator who is not going to ‘go off piste’ like the Truss government.”
For his part, Sunak was quick to issue a warning on Monday that the UK faces a “profound economic challenge.”
The two-year gilt yield dropped 37 basis points Monday to end at 3.43%. Longer notes also rallied hard, sending the 10-year yield to 3.75%, the lowest since the day former Chancellor Kwasi Kwarteng first announced his so-called mini budget.
“Sunak is clearly the market choice, and there will be relief that we have a safe pair of hands taking over,” said Russel Matthews, senior portfolio manager at BlueBay Asset Management. “This may not last long, but there will be a honeymoon period. The experiment with an extreme neo-liberal economic policy mix is well and truly over.”
Attention is already turning to Sunak’s cabinet and whether he’ll retain Chancellor of the Exchequer Jeremy Hunt, who helped calm markets after engineering the reversal of Truss’ policies. Hunt is due to set out the government’s medium-term fiscal plan on Oct. 31, alongside forecasts from the Office of Budget Responsibility.