UK Gilt Yields Hit Multi-Decade Highs as the Bank of England Prepares to Hold

The UK 10-year gilt yield jumped above 5.3%, its highest level since August 2007, as expectations built for further Bank of England rate rises¹. Reuters reported that 30-year gilt yields hit their highest since 1998². The move came as energy costs jumped and major central banks struck a more hawkish tone⁵.

The Bank of England is nonetheless expected to keep rates unchanged next week, at 3.75%, and market attention is likely to fall on how rate-setters vote⁴. Unlike the European Central Bank, which undertook a long-expected rate rise on Thursday, the Bank is expected to keep rates steady². The same expectation of an unchanged 3.75% and a closely read vote split was reported by Reuters⁵.

Why it matters to investors

The ECB’s decision raised the pressure. The Telegraph reported that the European Central Bank’s move increases the pressure on the Bank of England to ramp up borrowing costs³. Yahoo Finance UK reported that multiple Bank of England rate rises are expected after the jump in energy prices⁹.

Sterling did not benefit. The pound weakened to around $1.35 as the dollar strengthened, despite growing expectations for further Bank of England rate rises⁷. The sharper risk sits in the public finances: FXStreet’s analysis said that if the 30-year yield hits 6%, and the rest of the yield curve moves towards that level, the Chancellor’s fiscal headroom would be wiped out completely⁶.

What to watch

Reuters framed the week as one in which major central banks struck a more hawkish tone as energy costs jumped, with the Bank of England the exception that is expected to stand still⁵. Trading Economics recorded the 10-year gilt move as a 19-year high¹.

The vote split at next week’s meeting is the immediate signal, since the policy rate itself is expected to stay at 3.75%⁴. Investors will also read the Bank of Japan, which is expected to raise rates to 1.25% at a highly anticipated meeting next week, for a sense of how far the global hawkish turn has gone⁸.

The politics of bank profits is running alongside the bond market. The Telegraph reported that the chief executive of JP Morgan met Andy Burnham and John Healey amid fears of a bank tax raid¹⁰. That coverage sat directly next to the pressure on the Bank of England after the ECB’s increase¹⁰, and the two questions, gilt yields and how the budget is funded, are now hard to separate⁶.