Traders would prefer a power vacuum to Truss, analysts say

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Market traders would prefer a power vacuum to the prospect of Liz Truss remaining prime minister, analysts said.

Interest rates on government bonds, known as gilts, fell as the political unrest resumed, leading analysts to welcome the prospect of the end of the prime minister’s short term – even when the uncertainty of a political vacuum would generally be considered bad news.

Richard McGuire, an analyst at Rabobank, said markets have improved as “it has become increasingly clear over the [Wednesday] the speed at which the wheels come off the steering of Prime Minister Truss”.

“Essentially, we appear to be in the position where the growing likelihood of Prime Minister Truss’ resignation has seen what has been dubbed the ‘moron’s bounty’ quickly out of the gilt market (this is happening despite a complete lack of clarity on what will follow),” he said.

The yield on 10-year gilts briefly rose above 4%, but has now fallen back below 3.9%.

This is down from last week’s 4.6% peak, meaning gilts are almost halfway to where they were trading in early September.

Similarly, the yield on 30-year gilts, which saw an explosion in pension markets following the September 23 mini-budget, is now below 4%, against the high point of the week. last greater than 5%.

Other factors are also pushing UK markets.

The Bank of England has decided to start its quantitative tightening program – selling bonds bought under quantitative easing since 2009 – only with short- and medium-term bonds, rather than 20-year gilts and more that have caused so many problems with pension funds.

Bank Deputy Governor Sir Jon Cunliffe calmed markets late on Wednesday by saying liability-driven investment (LDI) funds at the heart of the turmoil could now face at least 200 basis points of yield movements.

This is well above the 100 basis points at which they had been “stress tested” by the Bank, and more important than the movements in the markets which triggered the chaos.

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