UK Gilt Yields Hit Multi-Year Highs as Middle East Oil Shock Fuels Rate Bets

British government bond yields climbed to fresh multi-year peaks on Monday, with the longest-dated debt touching levels last seen in the late 1990s, as a sharp jump in oil prices intensified inflation concerns and reshaped expectations for Bank of England policy.

The 30-year gilt yield reached 5.951%, its highest since March 1998, and was last trading about 3 basis points higher on the day. The 10-year yield rose to its strongest level since July 2007, while the 5-year yield hit its highest since July 2008, with both climbing roughly 6 basis points.

The trigger was a fresh surge in crude prices, which rose about 3% after new strikes on Saudi Arabian energy and civilian infrastructure and Iranian attacks on ships in the Gulf compounded supply worries following the closure of a key Saudi oil pipeline.

Investors responded by ramping up wagers that the inflationary pressure from costlier energy will compel the Bank of England to tighten policy more aggressively over the coming year. Markets fully priced two quarter-point rate increases by the end of the year, up from just one a week earlier. Economists surveyed nonetheless expect the central bank to keep rates unchanged at 3.75% at its meeting on Thursday.

Short-dated gilts underperformed comparable bonds in other major economies, a pattern that typically emerges when oil and gas prices spike and reflects Britain's dependence on imported energy.

"The uncomfortable message from the gilt market is that this is being interpreted as a UK inflation story," said Sahil Mahtani, director of 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."

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