By Miriam Mukuru
U.K. government bonds are experiencing the most intense selloff among developed-market bonds as surging oil prices raised inflation concerns.
Oil prices surged above $100 a barrel on Monday as the war in the Middle East continued. This has reignited concerns about the potential for high inflation and markets priced in a risk of the Bank of England raising interest rates in the coming months as a result, pushing up yields on U.K. sovereign bonds, or gilts.
U.K. 10-year government bond yields rose 13 basis points to a six-month high of 4.798%, Tradeweb data show. By contrast, German and U.S. 10-year government bond yields rose by around 4 basis points and 6 basis points, respectively. Short-dated gilt yields rose particularly sharply, with two-year gilt yields rising 23 basis points to 4.140%, Tradeweb data show.
"The deeper selloff in the U.K. gilts was down to a recalibration of rate cut expectations," XTB's Kathleen Brooks said in a note.
Investors no longer expect the Bank of England to cut interest rates in the coming months amid a surge in inflation worries.
Money markets currently price in a 4% chance of the Bank of England raising interest rates in March, a remarkable shift from the 83% chance of a rate cut that was priced in prior to the Middle East war, LSEG data show.
U.K. gas supplies are very tight and its heavy reliance on imports relative to its European peers makes it more vulnerable to higher energy prices, Brooks said.
The events in the Middle East could add between 0.3 percentage points and 1.2 percentage points to U.K. annual CPI inflation this year, Capital Economics deputy chief U.K. economist Ruth Gregory said in a note.
Tickmill analyst Patrick Munnelly said a 2.5 percentage-point inflation shock "could completely erode" the government's projected fiscal headroom of 24 billion pounds ($32.2 billion). "This doesn't even account for potential economic slowdowns due to higher energy costs or additional cost-of-living support policies," he said in a note.
Gilts have undone their gains during recent weeks.
Gilt yields fell sharply in mid-February as the outlook on U.K. public finances improved following higher-than-expected tax revenues at the start of 2026. The U.K. treasury chief Rachel Reeves announced a higher fiscal headroom during a presentation on the country's public finances before lawmakers last week.
Deterioration in U.K.-U.S. relations could also be adding a risk premium on U.K. government bonds, pushing up yields, XTB's Brooks said. Over the weekend, U.S. President Trump criticized the U.K. for failing to provide immediate support in the U.S. fight against Iran.
If the U.K. is successful in managing to repair diplomatic relations with the U.S., this could reduce the risk premium on U.K. government bonds, Brooks said.
Write to Miriam Mukuru at miriam.mukuru@wsj.com
(END) Dow Jones Newswires
March 09, 2026 08:11 ET (12:11 GMT)
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