Traders in UK government bonds helped topple Liz Truss. Now they’re setting their sights on the next goal: ensuring her successor will stick to the fiscal discipline required to shore up the country’s fragile finances.
Should word get out that the party’s considering a new prime minister who embraces fiscal largesse or any other unorthodox position, the market reaction, they warn, will be as swift and severe as the wild four-week-long rout that followed Truss’s ill-fated proposal to slash taxes and boost spending. As Gordon Shannon, a portfolio manager at TwentyFour Asset Management, put it: “Don’t mess with bond vigilantes.”
Some of this, of course, is just trading floor bravado.
Traders and investors are feeling powerful after watching Truss step down after only 44 days in office. But some of that power is real. They now have the ability to help influence policy and politics in the most meaningful way for years. The BOE is now slowly stepping back out of the market as part of its push to tame inflation, ceding more ground to investors to bid yields higher or lower in response to policy choices.
“The markets are clearly in charge now,” said Scott Service, portfolio manager and co-head of global fixed income at Loomis Sayles. “While some semblance of stability has returned following the about-face on fiscal policy, coming to agreement on the best course of action going forward to tame inflation without crushing the economy is no easy task.”
Truss’ premiership saw gilt yields post some of their biggest moves on record and the pound sank to an all-time low after announcing the largest package of unfunded tax cuts in half a century. On Thursday, sterling rallied more than 1 per cent after she confirmed her resignation and was steady around the $US1.123 level. The currency has been on a rollercoaster ride during the short tenure of the Truss government.
For now, the markets’ favourite appears to be Rishi Sunak, who warned that the outgoing administration’s fiscal measures would push Britain’s economy to the brink of collapse.
“If we get someone like Sunak in charge, given his finance background, his banking background, he would be viewed as positive and you’d probably see gilts and sterling rally at least in the very short term,” said Brad Bechtel, FX strategist at Jefferies.
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