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.
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. “Clearly a vote winner right now is ‘I’m going to be a really steady hand on the rudder’ and try to rebuild a bit of credibility,” said Lyn Graham-Taylor, a rates strategist at Rabobank.
The BOE next meets to set rates on 3 November and the market is currently pricing a high probability of at least a 75-basis-point increase.