UK Gilt Yields Hit Five-Month High on Rate Hike Bets

The yield on the UK 10-year gilt rose above 4.7%, its highest level since October 9 and up around 15 basis points on the week, as investors increased bets that the Bank of England could raise interest rates later this year. Expectations of tighter monetary policy have strengthened amid a sharp rise in energy prices linked to escalating tensions between the United States, Israel, and Iran. Oil prices surged above $100 per barrel as the conflict showed no signs of de-escalating, raising concerns that higher energy costs could reignite inflationary pressures across Europe. As a result, investors currently price in roughly an 80% probability of a 25-basis-point BOE rate hike by the end of the year. Meanwhile, data from the Office for National Statistics showed the UK economy stalled in January, missing expectations for 0.2% growth. Services activity was flat and production fell 0.1%, while GDP increased just 0.2% over the three months to January, slightly below forecasts.

The yield on the UK 10-year gilt climbed above 4.6%, marking its highest level since mid-October, as investors increasingly bet on a Bank of England rate hike this year amid rising energy prices fueled by the Middle East conflict, which could push inflation higher. Oil prices extended their rally after Iran intensified attacks on oil and transportation infrastructure across the region. Meanwhile, the International Energy Agency’s plan to release 400 million barrels from strategic reserves provided little immediate relief, as the supply may take weeks or months to reach the market. Money markets now assign a greater than 50% probability of a 25-basis-point rate hike by the Bank of England in December, a notable shift from expectations of no change just last Wednesday. Investors are also eyeing upcoming UK economic data, including the monthly GDP figures scheduled for Friday.

The UK 10-year gilt yield climbed back to around 4.55%, remaining close to the near four-month high of 4.59% reached earlier this week, as investors scaled back expectations for further interest rate cuts from the Bank of England this year. Rising geopolitical tensions linked to the Iran conflict have pushed energy prices higher and revived inflation concerns, prompting markets to reassess the outlook for monetary easing. Although oil prices have retreated from peaks above $100 per barrel, the earlier surge has been enough to significantly alter rate expectations. Money markets are now pricing in very little chance of rate cuts this year, a sharp shift from before the conflict, when investors had been anticipating around two reductions. Investors are also turning their attention to upcoming UK economic data, particularly the release of monthly GDP figures on Friday.