UK Gilt Yields Ease From Recent Highs

UK 10-year gilt yields eased to 5.35% after reaching their highest level since July 2007 last week, helped by lower oil prices and a pause following the recent sharp sell-off. Yields remain elevated, however, as high energy costs have fueled inflation concerns and stronger-than-expected economic growth reinforced expectations for interest rates to stay higher for longer. BoE policymaker Catherine Mann said on Tuesday that inflation above the Bank’s 2% target appeared to have become embedded in the economy. She warned that inflation could reach 4% around the turn of the year, when wage negotiations typically take place, potentially further entrenching price pressures. On the data front, UK construction activity continued to contract in September, although at a slower pace than expected. Builders also became less optimistic about the outlook, delaying major projects as higher rates, inflation and weak orders weighed on growth expectations.

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.