A sell-off in gilts accelerated on Tuesday as a surge in oil and gas prices unleashed by the Middle East war prompted traders to rapidly scale back expectations for interest rate cuts from the Bank of England.
The sharp moves in markets came as chancellor Rachel Reeves prepares to deliver her Spring Statement to parliament, where she is expected to claim she has rebuilt Britain’s public finances so that they can withstand any shock from the war in Iran.
The 10-year gilt yield jumped 0.14 percentage points to 4.5 per cent, reversing a rally that had reduced some pressure on the UK public finances.
Swaps traders have cut bets on the chance of a quarter-point cut by the BoE’s Monetary Policy Committee this month to about 30 per cent from 90 per cent on Friday. The market is now only fully pricing one quarter-point cut by the end of the year.
Investors fear that a prolonged rise in oil and gas prices will add to price pressures in the UK economy just as the BoE was on track to return inflation to its 2 per cent target in the next few months.
Gilts were underperforming other government bonds as “inflation in the UK has been more persistent and elevated than in any other European country”, said Tomasz Wieladek, chief European macro strategist at asset manager T Rowe Price.