UK Gilt Yields Climb to Multi-Year Highs as Oil Surge Stokes Inflation Fears

British government bond yields pushed to fresh multi-year highs in early trading on Monday, as a sharp jump in oil prices intensified concerns about inflation and hardened market expectations for tighter Bank of England policy.

The 30-year gilt yield touched 5.951%, its highest level since March 1998, and was last up 2 basis points on the day. The 5-year yield climbed to its highest since July 2008, gaining 6 basis points.

Investors increased wagers that the inflationary pressure from costlier oil will push the central bank into a faster pace of policy tightening over the coming year. Markets on Monday assigned a 90% probability to two quarter-point rate increases by the end of the year, up from just one such move priced in a week earlier. Economists surveyed were unanimous that the Bank of England will keep rates unchanged at 3.75% at its meeting on Thursday.

Short-dated gilts lagged comparable bonds in other major economies, a pattern that has become familiar on days when oil and gas prices spike, reflecting Britain's dependence on imported energy.

Oil prices rose about 3% on Monday after fresh strikes on Saudi Arabian energy and civilian infrastructure and Iranian attacks on ships in the Gulf compounded supply worries, following the shutdown of a key Saudi oil pipeline.

The yield moves further narrow the margin between Britain's existing budget plans and the fiscal rules that finance minister John Healey has promised to uphold as he prepares his first budget, due next month.

"The uncomfortable message from the gilt market is that this is being interpreted as a UK inflation story," said Sahil Mahtani, director at asset manager Ninety One's Investment Institute. "Britain has been hit by the same global shocks as its peers, but the market is demanding substantially more compensation for inflation risk here. That is the part of the selloff the government cannot dismiss as imported."