UK Bond Selloff Sends 10-Year Yield Back to 5% Ahead of BOE Meet

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(Bloomberg) — The UK’s government bonds are sliding on pressure from surging oil prices and political risks, sending the 10-year yield back above 5% for the first time in a month.

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The 10-year rate, a proxy for the country’s borrowing costs, has now risen in six of the past seven trading sessions, climbing nearly 30 basis points in under two weeks. The 30-year yield is also surging, touching its highest level since September — and not far off the most since 1998.

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The selloff comes as a fresh spike in Brent oil prices above $111 a barrel increases worries about the sustained impact of the war in the Middle East on inflation. It’s a challenging backdrop for the Bank of England’s policymakers meeting on Thursday, who are expected to stress test multiple scenarios that reveal how it might react to a prolonged energy price shock.

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While bonds fell across the world on Tuesday, the gilt market faces additional pressure due to the uncertainty clouding UK politics, with Prime Minister Keir Starmer facing a high-stakes vote later Tuesday. The higher borrowing costs are also painful for the country’s fragile fiscal headroom.

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“Gilts remain the weakest link heading into Thursday’s MPC, with global pressures compounded by renewed domestic fiscal and political noise,” said Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International. 

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The vote in Parliament Tuesday will determine whether Starmer will face an investigation into his assurances to lawmakers that due process had been followed in the appointment of Peter Mandelson as US ambassador. Pressure on his leadership has already been building ahead of local elections on May 7, where his Labour Party is expected to do badly.

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If the political backdrop continues to sour, it’s possible that the 10-year yield could rise as high as 5.50% “in a stressed scenario,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee, in a Bloomberg TV interview Tuesday.

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“If we see political changes post the elections in a few weeks, the local elections here, the question is well who would replace Keir Starmer and we are not exactly blessed with amazing candidates to replace him,” Kinsella said. “Markets will price in a bit less fiscal headroom for Rachel Reeves and consequently the gilt market may come under pressure.”

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