Bond yields in UK go down as Rishi Sunak becomes new Prime Minister

25 Oct 2022 , 10:47 AM

As investors wagered that the new Prime Minister Rishi Sunak will put an end to weeks of upheaval plaguing the nation’s markets and restore credibility to economic policymaking, UK bonds achieved some of their greatest gains ever.

Short-dated notes were the main driver of the rally, and the two-year yield dropped to its lowest level since 1993 after Sunak, a former chancellor who had warned against Liz Truss’ “fairytale” tax cuts, won the election to succeed her. The gains were boosted when traders reduced their expectations of rate hikes in the future.

Following a market collapse that caused rates to reach their highest levels in years, necessitated intervention by the central bank to stabilize the markets, and ultimately led her to rethink her plans for significant fiscal stimulus, Truss resigned last Thursday. Investors anticipate Sunak will end the economic harm.

Sunak, for his part, was quick to warn that the UK faces a “deep economic challenge” on Monday.

The yield on two-year gilts decreased by 37 basis points on Monday to close at 3.43%. Longer notes also had a strong rally, bringing the 10-year yield to 3.75%, the lowest level seen since the day when former chancellor Kwasi Kwarteng unveiled his mini budget’.

The focus is already on Sunak’s cabinet and whether he will keep Chancellor of the Exchequer Jeremy Hunt, who helped stabilize markets after implementing Truss’ policies in the opposite direction. On October 31, Hunt is scheduled to present the government’s medium-term financial strategy together with projections from the Office of Budget Responsibility.

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