Rishi Sunak, a former finance minister, easily won the election to succeed Liz Truss as prime minister on Monday, removing at least one potential source of concern for bond investors.
On Sunday and Monday, Sunak’s opponents, former prime minister Boris Johnson and cabinet minister Penny Mordaunt withdrew from the contest for the leadership of the Conservative Party.
The announcement that Rishi Sunak, a former finance minister, had won the competition caused Gilt to briefly spike. Even though they eventually lost ground, they kept the large gains they had made earlier in the day when Sunak’s triumph appeared more possible.
Following Liz Truss’ resignation as prime minister on Thursday, Indian-born British leader Rishi Sunak won the Conservative Party leadership contest to become the country’s new leader. Sunak was appointed and solemnly installed as the nation’s new Prime Minister on Tuesday by King Charles III of England.
After his rival Penny Mordaunt withdrew from the race, Rishi Sunak became the first color prime minister of Britain and received the support of more than half of the Conservative MPs.
Former British Prime Minister Boris Johnson was set to declare his candidacy, however, he withdrew from the contest as well after apparently falling short of the requisite 100 supporters. Johnson, however, asserted that he had the necessary backing but chose not to run because “it would just not be right to do.” Rishi Sunak was appointed as several notable Tories MPs paid a visit to his campaign office on Monday.
Sunak will need to take action as soon as he becomes a leader to address the UK’s deteriorating economy, which Truss was incapable of addressing. Her economic policies aggravated the crisis, sent the nation into even more disarray, and even sparked calls from the people for her to be removed from office.
UK bonds experienced some of their highest returns ever as investors bet that the new Prime Minister Rishi Sunak will stop weeks of turmoil afflicting the nation’s markets and restore confidence to economic policymaking. The rise was primarily driven by short-dated notes, and after Sunak, a former chancellor who had cautioned against Truss’ “fairytale” tax cuts, won the election to succeed her, the two-year yield fell to its lowest level since 1993. The gains were enhanced as traders lowered their forecasts for future rate increases.
Truss quit last Thursday in the wake of a market meltdown that drove rates to their highest levels in years, prompted central bank intervention to stabilize the markets, and ultimately had her rethink her plans for massive fiscal stimulus. Investors believe Sunak will stop the financial harm.
According to Marc Ostwald, chief economist and global strategist at ADM Investor Services Int., “for now, it’s relief that ‘complete turmoil’ is over.” He has a good reputation with the markets since he was a steady hand as chancellor and a polished communicator who won’t “go off piste” like the Truss administration.
The UK is facing a deep economic dilemma, according to Sunak, who quickly issued a warning about it on Monday.
In order to complete the day at 3.43%, the two-year gilt yield decreased by 37 basis points. Longer-term notes also experienced a strong rally, which caused the 10-year yield to drop to 3.75%, its lowest level since the day that former chancellor Kwasi Kwarteng unveiled his so-called micro-budget.
Sunak is undoubtedly the market’s choice, and it will be a relief to have a reliable successor in place, according to BlueBay Asset Management’s senior portfolio manager Russel Matthews. “There will be a honeymoon period, though it may not last very long. The experiment with a highly neoliberal mix of economic policies is conclusively over.”
The question of whether Sunak would retain Chancellor of the Exchequer Jeremy Hunt, who helped stabilize markets after following Truss’ policies in the opposite direction, is already in the spotlight as part of his cabinet. Hunt will deliver the government’s medium-term financial strategy and projections from the Office of Budget Responsibility on October 31.
As investors prepared for additional uncertainty, the price of gilts dropped on Friday, pushing up rates. Some investors feared that a second Johnson premiership may overturn the fiscal conservatism of the new finance minister Jeremy Hunt.
After one of the most volatile periods in British political history, Johnson announced his withdrawal from the contest late on Sunday, confessing that he could no longer bring the Conservative Party together.
The likelihood of a sizable fiscal consolidation has decreased, according to Ruth Gregory, an economist at consultancy Capital Economics, as a result of the decline in gilt yields following news today that Rishi Sunak will succeed David Cameron as Prime Minister of the United Kingdom.
The new PM will still need to put in a lot of effort to make the financial markets see stability again.
On Monday, other significant government bond markets also rose as investors reduced their bets on future interest rate increases by central banks in response to negative business survey results, but British debt outperformed.
After exceeding 165 bps on Friday, the difference in 10-year government bond yields between Germany and the UK dramatically shrunk to 146 bps.
