The selloff in gilts intensified on Tuesday as oil and gas prices surged due to the Middle East war, prompting traders to sharply reduce expectations of an interest rate cut from the Bank of England.
The sharp move in the market came as Chancellor Rachel Reeves prepares to deliver her spring statement to parliament, where she is expected to boast that she has rebuilt Britain’s public finances to withstand any shock from the war in Iran.
10-year gilt yields rose 0.14 percentage points to 4.5 percent, reversing a rally that had eased some of the pressure on UK public finances.
Swaps traders have cut bets on the likelihood of a quarter-point rate cut by the BOE’s monetary policy committee this month to about 30 percent, from 90 percent on Friday. The market is now fully pricing in just a quarter point by the end of the year.
Investors fear higher oil and gas prices will add price pressure to the UK economy, as the BoE was on track to bring inflation back to its 2 percent target over the next few months.
Tomasz Viladec, chief European macro strategist at asset manager T Rowe Price, said gilts were underperforming other government bonds because “inflation in the UK has been more stable and higher than in any other European country.”
