Oil above $100 lifts UK short-dated bond yields to one-week high

British government bond yields with maturities of two and five years climbed to their highest level in a week on Wednesday, after crude oil prices breached the $100-per-barrel mark for the first time in six weeks. The move rekindled fears that elevated energy costs could keep inflation sticky, prompting investors to reassess the path of interest rates.

At 0925 GMT, the two-year gilt yield stood at 4.629%, up more than 3 basis points on the day and the highest since September 2, when it touched a five-month peak of 4.691%. The five-year yield also rose by about 3 basis points to 4.727%, its strongest since a week earlier when it reached a three-year high of 4.785%.

"Higher crude has revived concerns that the energy shock could stall disinflation and force central banks to remain restrictive," said Daniela Hathorn, senior markets analyst at broker Capital.com.

Market pricing now implies a 70% probability that the Bank of England will raise its key rate by November, even though economists polled by Varta Wire expect no change at next week's meeting or for the rest of the year. BoE Governor Andrew Bailey told a parliamentary committee on Tuesday that market pricing reflected the risk of further energy-driven inflation pressure, but stressed the central bank was not signalling an imminent rate rise.

Adding to the fiscal backdrop, Britain's auction of 30-year benchmark gilts on Tuesday set a yield of 5.817% — the highest borrowing cost for the government since at least 1998. That development intensifies pressure on finance minister John Healey as he prepares his debut budget next month.