UK Gilts Recover as Energy Prices Ease

UK gilts recovered from their recent selloff, with the 10-year gilt yield falling to just below 5.2% from a 19-year high of 5.29% reached on Wednesday. Easing energy prices helped temper inflation concerns, prompting markets to marginally scale back expectations for Bank of England rate hikes. Brent crude retreated from six-week highs, while natural gas prices eased from their highest level since January 2023 after US President Donald Trump said the renewed US military campaign in Iran would not last long. Gilt yields nevertheless remain elevated amid concerns over energy-driven inflation, higher interest rates and fiscal sustainability in the UK, despite Prime Minister Andy Burnham’s efforts to reassure markets of the government’s commitment to fiscal discipline. Markets are now fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027.

UK 10-year gilt yields pared early gains to trade just above 5.2% on Wednesday, after touching their highest level since August 2007, as investors digested Prime Minister Andy Burnham’s speech to the House of Commons. Burnham reaffirmed the government’s commitment to fiscal responsibility and debt reduction, while saying the early budget date was intended to limit speculation. Meanwhile, Chancellor John Healey is expected to deliver his first major speech in the role as soon as next week. Elsewhere, Brent crude hovered near six-week highs as traders weighed persistent Middle East supply risks against signs that oil was still reaching the market. Markets continue to price in a 25bp BoE rate hike by year-end, with expectations reinforced by accelerating UK shop-price inflation. In the US, markets are pricing in a 66% probability of a September Fed hike following hawkish remarks from Fed Chair Kevin Warsh and higher oil prices.

UK 10-year gilt yields climbed above 5.25%, tracking a broader global bond sell-off and reaching their highest level since August 2007, as rising oil prices and increasingly hawkish signals from major central banks have fueled expectations for higher-for-longer interest rates. Brent crude rose as renewed Middle East hostilities heightened concerns over disruptions to regional energy flows. Markets are now pricing in a 25bp BoE rate hike by year-end, with a November move seen as almost 70% likely and a further hike by February 2027 priced at around 80%. Rate expectations were also reinforced by the latest British Retail Consortium report, which showed UK shop-price inflation accelerating to its highest level in two years. Meanwhile, Fed Chair Kevin Warsh said inflation has not slowed meaningfully and that the Fed still has “work to do,” prompting markets to price a 68% probability of a September rate hike.