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A rout in the gilt market deepened on Monday as traders bet that the Bank of England would have to raise interest rates four times this year to counter surging energy prices.
The 10-year gilt yield climbed 0.06 percentage points on Monday morning to 5.05 per cent, keeping borrowing costs at their highest level since 2008.
Since the conflict in the Middle East began, the 10-year yield has risen 0.8 percentage points, putting gilts on track for their worst month since the “mini-budget” crisis in 2022.
The two-year yield, which is sensitive to changes in interest rate expectations, rose 0.08 percentage points in early trading on Monday to 4.65 per cent.
Traders in the swaps market are now fully pricing four quarter-point interest rate rises by the BoE this year, ratcheting up bets from last week that had taken the market to three increases. Before the conflict began, investors were expecting two cuts.
Surging energy prices have fuelled fears that the UK could be facing a period of stagflation, where high inflation prevents the BoE from cutting interest rates to support the economy.
The gilt moves were “starting to look very excessive”, said Derek Halpenny, head of research in global markets for Europe, the Middle East and Africa at MUFG, adding that the expectation of four rate rises was “way overdone”.
Investors are also worried that rising borrowing costs and measures to protect consumers from the energy shock will hurt the UK’s public finances. Gilt yield moves have been further exacerbated by speculative investors being forced to exit positions in the volatility, market participants said.
Gilts were suffering from a mixture of “stagflation, fiscal slippage and fraught positioning — an unholy trinity”, said Stephen Jones, chief investment officer at Aegon Asset Management.