UK Gilt Yields Remain High on Rate Hike Bets

The yield on the UK 10-year gilt hovered just above 4.7%, after hitting its highest level since early September on Friday, as ongoing Middle East tensions fueled concerns over the Bank of England’s policy outlook ahead of this week’s decision. Israeli officials warned the conflict could continue for “several more long weeks,” while US President Donald Trump said Iran is “not ready” to reach a deal. Rising energy prices have led traders to revise their interest rate expectations, with markets now pricing in around 23 basis points of a hike for December, just below a quarter-point increase, after fully pricing in a hike last week. This represents a notable turnaround from early March, when investors anticipated two rate cuts this year. For the upcoming March meeting, focus will be on the vote split, with a 7-2 or 6-3 decision to hold rates considered the most likely outcome.

The yield on the UK 10-year gilt rose above 4.7%, touching its highest level since early September, 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 US, 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.