UK Bond traders warn against anything but tightening

Traders in UK government bonds were unintentionally contributing to toppling Liz Truss from the premier position. So, what could be the next goal?

Perhaps the logical next goal is to ensure that the successor of Truss will stick to the fiscal discipline required to prop up the UK’s fragile financial conditions.

The problem was not mainly with Truss, rather it was with her economic policies. If the Conservatives consider a new prime minister who embraces fiscal generosity or any other unorthodox position, the market reaction could be swift severe and wild like Truss’s ill-fated tax cut.

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 contain inflation. The markets are clearly in charge now.

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 fifty years. On Thursday, the sterling rallied more than 1% after she confirmed her resignation.

The markets’ favourite successor of Truss coulkd be Rishi Sunak, who warned that Truss’ fiscal policies do push the UK economy to the brink of collapse.

Given his finance background, Sunak would be viewed as positive and traders would probably see gilts and sterling rally at least in the very short term. A new leader will be in place ahead of the slated announcement of the government’s medium-term fiscal plan on October 31.