In Focus: Fixed income  

What Liz Truss's premiership means for bonds

What Liz Truss's premiership means for bonds
New Conservative Party leader Liz Truss

Liz Truss's confirmation as the next UK prime minister spells troubling news for bonds, experts say, though many concerns have already been priced in.

Truss, who was elected Conservative Party leader on September 5, will become prime minister tomorrow but faces a monumental task upon taking office, given the cost of living crisis the UK is facing and the recession forecast by the Bank of England.

She has already pledged £30bn of tax cuts and to borrow more to plug the hole in funds.

As many of Truss's pledges are unfunded, at rising interest rates this could mean a costly debt burden for the UK economy, whose public sector net debt already runs at 96 per cent of GDP, according to the ONS.

So-called Trussenomics - cutting taxes and spending big - is fuelling concerns that inflation will take longer to be brought back under control, meaning rates will rise faster and stay high for longer.

Bond markets already reacted in the run-up to her arrival, with the yield on 10-year government debt heading towards 2.92 per cent and remaining more or less unchanged since her appointment was confirmed.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "Truss and her preferred candidate for chancellor, Kwasi Kwarteng, are much more relaxed about higher levels of borrowing than their predecessors and that continues to cause jitters in financial markets.

"The pound is still hovering near 2.5 year lows at $1.15 while the yields on UK 10-year government debt are little changed at 2.93 per cent.

"Yields have registered the biggest monthly rise since 1986 as Liz Truss hurtled towards Downing Street, throwing out promises of slash and spend on the campaign trail, which threaten to cause fresh problems for the UK economy."

Dan Boardman-Weston, chief executive and chief investment officer at BRI Wealth Management, agreed with Streeter's views, saying the announcement had been expected, meaning it had been priced in.

He said the impact on equity, bond and currency markets had therefore been limited today, though sterling and gilts have been "very weak" over the last month.

Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, said gilt yields would continue to rise on ongoing Bank of England rate hikes and given the potential for Truss’s tax cuts to be mostly unfunded.

He said: “It looks as if Truss will likely prioritise boosting economic growth rather than redistributing wealth. While the most important thing when it comes to supporting economic activity is a range of structural reforms, which could perhaps end up being market moving especially for equities and the currency, the details are very important here and this is what the market will likely focus on going forward.