UK Bond Market Prices in Three Bank of England Rate Hikes

A sharp sell-off in government bonds has investors betting on three interest rate hikes from the Bank of England over the next two years, a scenario that would have seemed unlikely just months ago.

The yield on two-year gilts has climbed past 4.5%, while ten-year gilt yields have pushed above 5.25%, their highest level since August 2007, according to Trading Economics data.

This sudden shift in market expectations matters far beyond the trading floor, as gilt yields directly impact swap rates used by lenders to price fixed mortgage deals.

Two key factors have contributed to this change: oil markets remain volatile due to ongoing tensions involving Iran, and newly installed US Federal Reserve chair Kevin Warsh has taken a more hawkish stance, warning of ongoing inflation pressures and the need for further rate action.