LONDON: British government bond prices surged on Monday after US President Donald Trump ordered a five-day pause on airstrikes against Iranian energy infrastructure and said the two countries had undertaken productive talks over the past two days.
Shortly before Trump’s post on social media, British 10-year government borrowing costs had risen to their highest since July 2008 at 5.118 per cent on concerns that prolonged conflict would push up British inflation and government borrowing.
But less than half an hour after hitting that peak, the yield on the benchmark 10-year gilt had tumbled to 4.895 per cent as the price of the bond rallied.
At 1139 GMT, the 10-year gilt yield was broadly unchanged from Friday’s close at 5.0 per cent as markets digested Trump’s comments and Iran’s initial response.
INVESTORS SCALE BACK BETS ON BOE RATE RISES
Interest rate futures shifted sharply to price in three quarter-point rate rises by the Bank of England this year, down from four earlier in the session and in line with their level at the end of last week.
Gilt yields, which directly affect the cost of new government borrowing, are still much higher than before the start of the conflict as markets continue to expect higher inflation as oil and gas supplies will remain disrupted for some time, even if the Middle East conflict is scaled back.
Ten-year gilt yields are about 70 bps higher since the start of the month, on track for their biggest calendar-month increase since September 2022, when former prime minister Liz Truss’ budget plans roiled markets.
UK Prime Minister Keir Starmer was due to hold an emergency meeting with senior ministers and BoE Governor Andrew Bailey later on Monday to discuss the response to soaring energy costs.
Benchmark 10-year gilt yields pushed past the 5.0-per cent barrier to their highest since the global financial crisis on Friday, and have risen around twice as much as US or German bond yields since the start of the conflict.
“The main victims, in terms of bond market behaviour, are the sovereigns which displayed specific vulnerabilities before the oil shock materialised. The UK is one of the most obvious cases,” Gilles Moec, group chief economist at French insurer Axa, wrote in a note to clients.
Moec said Britain needed to tackle “stubborn inflation which the oil shock is only going to exacerbate” and that it was more reliant on foreign investors to buy its debt than in the past.
On Thursday, the BoE forecast inflation would rise to 3-3.5 per cent in the middle of this year, rather than falling back to 2.0 per cent as it had forecast last month, and said further interest rate cuts no longer looked appropriate in the immediate term.
Two-year gilt yields, which are especially sensitive to BoE rate expectations, rose nearly 14 bps from Friday’s close to reach 4.712 per cent at 1056 GMT, pushing past a peak set in January 2025 to their highest since November 2023.
But by 1148 GMT, after Trump’s comments and Iran’s response, the yield was around 15 bps below its peak and 3 bps lower on the day at 4.55 per cent.
