U.K. Bonds Flip To Gains As Traders Pare BOE Rate Hike Wagers
U.K. bonds were under pressure and the pound dropped amid doubts over whether Prime Minister Liz Truss can cling onto power.
(Bloomberg) -- UK bonds rallied Thursday, erasing earlier losses, as traders pared interest-rate bets and assessed whether Prime Minister Liz Truss can cling onto power.
The yield on 10-year securities fell 9 basis points after climbing as much as 14 basis points earlier in the session, to outperform German peers. The reversal came after Bank of England Deputy Governor Ben Broadbent said it’s not clear that UK rates need to rise as much as investors expect.
Easing rate hike bets helped offset the impact of ongoing chaos in Westminster, where Truss is meeting the official in charge of leadership votes. While her tenure has largely been rejected by markets so far, her departure could plunge the UK into more turmoil if it were to come before Oct. 31, when the government is due to set out its medium-term fiscal plan.
“You can’t be a gilt investors and be happy with the political chaos in Westminster at the moment,” said Antoine Bouvet, rates strategist at ING Bank NV.
Read more: Truss ‘Risk Premium’ Still Dogs UK Bonds Where Volatility Reigns
Money markets are pricing 85 basis points of hikes when central bank policy makers meet next month, down 5 basis points on the day. The pound was little changed at around $1.12.
Truss’ premiership has looked increasingly untenable since new Chancellor of the Exchequer Jeremy Hunt abandoned the majority of pledges set out in his predecessor’s growth plan. The crisis escalated Wednesday when she fired Home Secretary Suella Braverman for what was described as a national security breach.
Read more: Truss’s Government on Brink as Tories Agitate for Her to Go
Many Conservative lawmakers now want Truss to resign immediately and speculation is already rife over who could replace her. One candidate is Rishi Sunak, whom Truss beat in the leadership campaign just six weeks ago.
“If there is a change in leadership, the question is how long does it take to get that new leader in place,” Craig Inches, head of cash and rates at Royal London Asset Management, told Bloomberg TV.
Were Sunak to prevail, that could help calm markets, Inches said. The former chancellor had claimed during the leadership contest that his opponent’s fiscal measures would push Britain’s economy to the brink of collapse.
--With assistance from and .
(Updates prices, adds Broadbent comment in second paragraph.)
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