George Parker AT GeorgeWParker
This is significant. If the OBR can be convinced that Sunak/Hunt have a grip - and that there won't be a political chaos premium on gilt yields - that will reduce the size of the fiscal hole to be filled next week by tax rises and spending cuts
www.ft.com/content/a5758ce9-f8f3-4013-aa97-81ff3db3eaf2
Gilt yields return to levels before mini-Budget
Prices rally as markets react with relief to Sunak’s victory in leadership contest
The 30-year gilt yield fell to 3.68 per cent, extending its price rise on Monday as markets reacted with relief to Sunak’s emergence as the sole candidate for the Conservative party leadership.
The move means long-term bonds, which were at the centre of a chaotic sell-off last month that prompted emergency intervention from the Bank of England, have recovered the losses triggered by Liz Truss’s package of tax cuts.
Yields on the 30-year bond, which had surged as investors worried about the UK’s hefty borrowing needs, traded at 3.75 per cent before the former prime minister’s fiscal plans were unveiled on September 23.
Two-year gilts have also recovered their post-budget losses, trading at 3.35 per cent on Tuesday. Ten-year gilt yields remain slightly higher at 3.69 per cent, compared with 3.50 per cent on September 23.
“On the face of it this suggests the last month has been a waking nightmare, and we’re back to where we would have been if Rishi Sunak had won the Tory leadership in the first place,” said James Athey, a fixed-income portfolio manager at Abrdn.
and
If Sunak confirms he will retain chancellor Jeremy Hunt — whose scrapping of most of Truss’s tax cuts helped restore order to the gilt market last week — then UK government bonds could rally further, analysts say. Sunak is seen by investors as far more likely to back the new chancellor’s fiscal plans.
“The market hope is that Sunak, a former chancellor of the exchequer and architect of tax rises that were subsequently reversed by the ill-fated mini-budget, will err on the side of fiscal caution,” said Antoine Bouvet, a rates strategist at ING.
So expectation is taxes higher but this will mean that interest rates stabilise and this should also stablise inflation as the pound will trade higher (so imports - particularly food and fuel - are cheaper).
Higher taxes reduce the need for cuts being as deep.
Given the reasons why Truss was SOOOO unpopular, he SHOULD see a popularity boost from policy not just a honeymoon period.
HOWEVER he has to push this past his own party first.