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Gilts’ slide deepened in choppy trading on Monday, as rising energy prices raised fears of an inflation shock in Britain and prompted traders to bet on an interest rate hike from the Bank of England.
The yield on two-year gilts rose 0.24 percentage points to 4.11 percent, one of the biggest one-day selloffs in recent years, while the yield on 10-year gilts rose 0.17 percentage points to 4.79 percent. Yields increase when prices fall.
The gilt market is at the center of a global bond slide as rising oil and gas prices caused by the Middle East war force investors to fundamentally shift their bets on the future path of interest rates.
“The change (in central bank rate expectations) has been really fast and brutal,” said Moyen Islam, head of UK rates strategy at Barclays. “Gilts are holding a lot of muscle memory in the market over the 2022-23 period, where rising energy prices drove inflation higher which pushed yields higher,” he said.
Traders are now predicting about a 70 percent chance that the BOE will raise interest rates by a quarter percentage point before the end of the year. Before the conflict began 10 days earlier, two quarter-point cuts had been priced in.
Expectations for rate cuts in major economies have diminished. The market now expects two quarterly rate hikes from the European Central Bank by the end of the year, where there were modest expectations for further cuts before the conflict.
In the US, the Federal Reserve is expected to make one or two more cuts, compared to two or three before the conflict.
Gilts have been particularly weak as the BOE was expected to cut rates more aggressively than central banks in other major economies this year.
Oil prices rose further on Monday, with international benchmark Brent crude surpassing $100 a barrel for the first time in four years. European gas prices also rose, with the region’s benchmark rising 13 percent.
The sharp shift in interest rate expectations has been fueled by rising energy prices since the US and Israel attacked Iran, escalating regional conflict that has virtually halted the flow of oil and gas from the Middle East.
“Gilts remain more sensitive to energy prices than other markets, although this is beginning to look somewhat inconsistent,” said Jason Borbora-Sheen, portfolio manager at Ninety One.
Yields on two-year gilts have now risen more than 0.6 percentage points since the conflict began, to their highest level since April 2025.
The negative impact of high oil prices on economic growth also “needs to be priced in,” Borbora-Sheen said.
