LONDON - British government bond prices rose sharply on Monday as former finance minister Rishi Sunak cruised to victory in the race to succeed Liz Truss as prime minister, removing at least one source of uncertainty for bond investors.
Sunak's rivals, former prime minister Boris Johnson and cabinet minister Penny Mordaunt, dropped out of the Conservative Party leadership race on Sunday and Monday.
Gilt jumped briefly on the news that Sunak, a former finance minister, had won the contest. Despite falling back later, they retained the hefty gains racked up earlier in the day when Sunak's victory looked increasingly likely.
As of 3:05pm (1404) GMT, yields across short- and medium-dated gilts dropped by around 30 basis points on the day, with 20- and 30-year gilt yields down more than 20 bps.
Gilt prices had fallen on Friday, pushing up yields, as investors braced for more uncertainty, with some fearing that a second Johnson premiership could reverse the fiscally conservative stance of new finance minister Jeremy Hunt.
Johnson quit the race late on Sunday, admitting that he could no longer unite the Conservative Party following one of the most turbulent periods in British political history.
"The fall in gilt yields on the news today that Rishi Sunak will become the UK's next Prime Minister has reduced the chances of a significant fiscal consolidation," said Ruth Gregory, economist at consultancy Capital Economics.
"Even so, the new PM will still have to work hard to restore stability in the eyes of the financial markets."
Other major government bond markets also rallied on Monday as downbeat business surveys prompted investors to reel in bets on future interest rate hikes by central banks, although British debt outperformed.
The spread between 10-year German and British government bond yields narrowed sharply to 146 bps, after rising above 165 bps on Friday.
(Reporting by Andy Bruce Editing by William Schomberg)