UK Gilt Yields Rise on Fiscal Concerns, Oil Surge

UK 10-year gilt yields eased below 5.4% after touching their highest level since July 2007, as the recent rise in oil prices paused and investors took a breather following a sharp sell-off. Gilt yields remain elevated, as higher energy costs heightened inflation concerns and stronger-than-expected economic growth reinforced expectations for interest rates to remain higher for longer. Several Bank of England policymakers, including Governor Andrew Bailey and MPC members who voted to hold rates last month, have signaled greater openness to a rate hike as rising energy prices increase the risk of inflation remaining above target. Markets are pricing around 30 basis points of Bank of England tightening by year-end and roughly 90 bps by the end of 2027. Higher borrowing costs pose an additional challenge for the government as it seeks to ease cost-of-living pressures ahead of the October 28 budget.

UK 10-year gilt yields climbed to 5.5%, their highest since July 2007, while 30-year yields reached 6% for the first time since 1998 as a renewed global bond selloff gathered pace. The 10-year yield rose more than 20 basis points in September, as higher energy costs fueled inflation concerns and stronger-than-expected economic growth strengthened the case for higher-for-longer interest rates. Several Bank of England policymakers, including Governor Andrew Bailey and MPC members who voted to hold rates last month, have signaled growing openness to a rate hike as rising energy prices increase the risk of inflation remaining above target. Markets expect the Bank of England to begin tightening monetary policy as early as November, with LSEG data showing investors pricing in four rate hikes by July 2027. Higher borrowing costs come at a challenging time for the government, which is seeking to ease cost-of-living pressures ahead of the October 28 budget.

UK 10-year gilt yields hovered below 5.4% at the end of September, slightly below a 19-year high reached earlier in the month, as markets became more cautious about further central bank rate hikes. Despite this, gilts endured a sharp selloff over the month, with yields rising 23 bps. Higher energy prices stoked inflation concerns, while expectations that the AI boom could support economic growth strengthened the case for higher-for-longer interest rates. Market sentiment improved on Wednesday as central bankers pushed back against expectations of rapid and sustained tightening. Bank of England policymaker Alan Taylor played down the need for rate hikes to address the UK’s energy crunch, contrasting with more hawkish comments earlier in the month from other MPC members, including Governor Andrew Bailey. In the US, Fed's John Williams likewise said there was time to assess incoming data before raising rates again. Meanwhile, upward revised figures showed UK GDP grew 0.5% in Q2.