Anyone has been in the bond markets for more than a minute remembers the fall of 2022 when UK PM Liz Truss was unceremoniously dumped by her own party after serving 45 days in office as the Gilts market collapsed at unprecedented speed amid economic chaos triggered by her 'mini-budget' (and multiple ministerial resignations).
The reason we reminisce is that this morning - after a long-weekend closed -UK Gilt yields are soaring once again... to their highest level since 1998 (and are a stunning 80bps above the Trussian highs)as worries intensified over local government elections and the impact of soaring energy prices on the economy.
While bond investors around the world have signaled their discontent with faster inflation and potentially higher interest rates,the UK stands out as the most extreme example.
As Bloomberg reports, the combination of Britain’s messy political landscape, with unpopular Prime Minister Keir Starmer likely to face a leadership challenge, feeble economy and strained government finances have made it a target for traders looking for a weak link.
“The market has one eye on the fact that Starmer’s days are numbered, and if not numbered then a further move to the left of the political spectrum is inevitable in an attempt to head off support for the Green party,”said Lloyd Harris, head of fixed income at Miton Group.
The UK 10-year yield has jumped 70 basis points since the start of the war, the biggest increase among a basket of developed markets tracked by Bloomberg over that period.
The UK's problems are both domestic and foreign.
This coming Thursday’s May local elections should keep focus high on the lingering risks of a flare-up in UK political or fiscal premium.
Goldman Sachs traders believe that options markets are right to price-in relatively limited vol premium for the day itself.
The larger risks are likely in the form of either leadership challenges to the PM, or a shift in focus back to a constrained fiscal position on account of the evolution of energy prices and Gilt yields throughout the energy shock, and both of these are likely less immediate.
Source: ZeroHedge News
