According to APP, the UK gilt market suffered a sharp drop on Monday as markets anticipated the Bank of England would have to raise interest rates four times this year to combat rising energy prices. In the morning, the yield on 10-year gilts rose 0.06 percentage points to 5.05%, keeping borrowing costs at their highest level since 2008. Since the outbreak of conflict in the Middle East, the 10-year gilt yield has risen 0.8 percentage points, putting UK gilts on track for their worst month since the 2022 “small budget” crisis. The surge in energy prices has raised concerns that the UK may be heading into stagflation.

"The movement in government bonds looks a bit overdone," said Derek Halpenny, head of global markets research for Europe, the Middle East, and Africa at MUFG. He also noted that market expectations for four rate hikes were "exaggerated." The chief investment officer of Aegon Asset Management stated, "Government bonds are suffering from the combined effects of stagflation, runaway fiscal policy, and unfavorable market positioning—a truly alarming combination."

Tensions in the Strait of Hormuz have kept oil and natural gas prices high. As a net energy importer, the UK is experiencing stronger-than-expected imported inflation, requiring the central bank to anchor prices to stability through multiple interest rate hikes. The yield curve has steepened significantly, and rising short-term borrowing costs have begun to transmit to mortgage lending and corporate financing, suppressing consumption and investment.

Comparison of recent changes in UK government bond yields

Derek Halpenny believes current market pricing is somewhat excessive and suggests monitoring whether energy prices will stabilize in the spring to alleviate pressure. However, Aegon's chief investment officer warns that with three unfavorable factors combined, the bond market still faces the risk of adjustment in the short term.

Editor's Summary : Objectively speaking, the surge in energy prices triggered by the Middle East conflict has pushed the UK government bond market under the dual pressures of stagflation and deflation, with yields rising to 5.05%, marking the worst monthly performance since 2022. Although some institutions believe that the expectation of four rate hikes is too aggressive, the drag on economic growth from high borrowing costs is a reality. Investors need to closely monitor the Bank of England's meetings and oil price movements, and appropriately reduce duration exposure to cope with increased volatility.