UK borrowing costs fall sharply after Johnson rules himself out of race to No 10

UK borrowing costs fell sharply today after Boris Johnson ruled himself out of the race to become Britain’s third prime minister this year late last night.

Yields on the 10-year gilt fell around 20 basis points this morning to below four per cent. Yields and prices move inversely.

On the 30-year gilt, rates dropped around 14 basis points, while yields on the 5-year gilt also dipped.

The downward move is likely being driven by investors warming to the idea of former chancellor Rishi Sunak seizing the keys to Number 10.

At the back end of last week, yields climbed higher and the pound fell sharply against the US dollar as Johnson emerged as the front runner to win the second Tory leadership race this year.

Yield on 10-year gilt

Sterling rose 0.3 per cent against the greenback.

Late last night, Johnson said he would not run in the contest, despite claiming he had passed the 100 threshold of supporting MPs needed to put himself on the ballot.

“Sunak should be viewed as the “continuity candidate”,” analysts at NatWest said.

UK financial markets have been extremely choppy since former prime minister Liz Truss last month launched £45bn of unfunded tax cuts and ramped up government borrowing in her mini-budget.

The pound dropped to a record low and yields touched their highest level in over 20 years in the days after the mini-budget on 23 September.

She was eventually forced to ditch nearly all of her flagship package and was forced to quit Number 10 after just 44 days in charge.

Beyond the Westminster drama, gilt traders will also be closely watching a speech from a top Bank of England official this week.

Huw Pill, Threadneedle Street’s chief economist, is speaking at an event on Thursday hosted by the Office for National Statistics on how to interpret cost of living figures.

Pill has doubled down on the insisting a “significant” monetary policy response at the Bank’s next meeting on 3 November is needed to tame inflation, running at a 40-year high of 10.1 per cent, and shore up financial markets.

Investors now expect UK borrowing costs to peak at just under five per cent. After the mini-budget, peak rate expectations topped six per cent.

The Bank has lifted rates seven times in a row, including two back-to-back 50 basis point hikes, to 2.25 per cent.