UK Gilt Yields Rise as Energy Prices Lift Rate-Hike Bets

UK 10-year gilt yields rose above 5.4%, their highest level in nearly two decades, as oil prices climbed amid fading hopes of progress in US-Iran talks. Iran said it would not soften its conditions for reopening the Strait of Hormuz, after President Trump rejected its proposal. Trump also said Iran had “overplayed its hand” and that negotiations could resume this week. Markets increased bets on tighter Bank of England policy, pricing in an over 80% chance of a rate hike in November. BoE Governor Andrew Bailey said last week that persistently high energy prices would make it harder to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli also signaled growing support for a hike. Meanwhile, Chancellor John Healey is set to address the Labour Party conference ahead of next month’s Budget, with potential measures beginning to emerge, including a possible revival of the Help to Buy scheme for first-time buyers.

UK 10-year gilt yields rose to 5.4%, a near two-decade high, as investors digested a series of comments from Bank of England policymakers for further clues on the monetary policy outlook. BoE Governor Andrew Bailey said persistently high energy prices would make it harder for the central bank to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli also signaled they were moving closer to supporting a rate hike as rising energy prices increased the risk of inflation remaining above target. The warnings come at a challenging time for Prime Minister Andy Burnham and Finance Minister John Healey, who are seeking to ease cost-of-living pressures ahead of the October 28 budget. Markets are pricing in roughly an 80% chance of a BoE rate hike in November, with slightly more than four 25bp increases priced into the curve over the next year. In the US, investors have likewise increased bets on further Federal Reserve rate hikes following hawkish comments from policymakers.

UK 10-year gilt yields eased slightly to 5.35% as oil prices retreated from a two-day rally following reports that the US and Iran were considering a phased agreement that could reopen the Strait of Hormuz. Despite the pullback, gilt yields remain close to multi-year highs as the US-Iran conflict and elevated energy prices continue to fuel concerns over renewed inflationary pressures. Markets continue to price in a solid probability of a 25-basis-point Bank of England rate hike in November. Earlier this week, BoE Deputy Governor Sarah Breeden said it could become “increasingly appropriate” to respond to rising inflation risks by raising interest rates. Deputy Governor Clare Lombardelli likewise said rates may need to rise if energy prices remain elevated, while MPC member Swati Dhingra said inflation expectations were not yet a source of concern. In the US, investors also increased bets on further Federal Reserve rate hikes following hawkish comments from policymakers.