A period of calm after the storm

The reversal of Truss/Kwarteng’s fiscal policies and Rishi Sunak’s appointment as the UK’s new Prime Minister has ushered in a period of calm in UK financial markets after the recent storm. Indeed, much of the extra political risk premia on gilts that emerged in the wake of the mini-budget on 23^rd September appears to have unravelled. 10-year yields have eased from 4.60% following the mini-budget to 3.64% now. Meanwhile, the 30-year gilt yield is now firmly back below the 30-year US Treasury yield. This, alongside our forecast for Bank Rate to rise sharply to a peak of 5.00% suggests that even if the new Prime Minister manages to fully regain the confidence of investors with more prudent fiscal policy, gilt yields probably won’t fall too much further from here.