UK gilt yields hit three-year high on Bank of England rate-hike bets

what happened

Yields on short-dated UK government bonds, known as gilts, climbed to their highest level in more than three years on Friday. Investors expect the Bank of England to raise rates quickly over the coming year. LSEG data showed two-year gilt yields jumped to 5.005%, the highest since October 2023, according to Dow Jones Newswires.

The move followed September GDP data published on Thursday, which beat expectations. Monthly output rose 0.2%, compared with a 0.1% contraction forecast by economists in a WSJ poll. UK growth has been among the strongest in the developed world this year despite the energy supply shock from wars in the Middle East and Ukraine. Nomura analysts linked the expansion to investment in artificial intelligence and productivity gains, while BCA Research said sustained growth could push the BoE to signal further hikes at upcoming meetings.

LSEG data showed markets now price an 82% chance of a BoE rate increase in December, up from 50% at the start of the week. Investors fully price three more hikes by mid-2027, on top of the November increase. BoE deputy governor Clare Lombardelli this week called for another rate rise to contain inflation risks. Strong US jobs and inflation data have also pushed up expectations for Federal Reserve tightening and lifted US Treasury yields. Two-year gilt yields last traded at 4.969%.

why it matters

Higher gilt yields mean lower bond prices. Expectations of a tighter BoE path usually support the pound, but they also add pressure on UK government debt costs amid high energy prices and inflation concerns.

market impact

Gilts: expected BoE rate hikes pressure bond prices; the pound gains from higher rate expectations

• ▼UK gilts pressure down — higher BoE rate expectations lift yields and push bond prices lower
• ▲Pound sterling pressure up — expectations of higher BoE rates support the currency

tags

instruments