UK gilts take new turn for the worse as investors eye oil reserves

By Andy Bruce

MANCHESTER, England, March 11 (Reuters) - British government bond prices fell sharply in early trade on Wednesday, as markets doubted whether the plans for a record release of oil reserves could offset potential supply shocks stemming from the U.S.-Israeli war on Iran.

Short-dated gilt yields, which move inversely to the price, were up by around 12 basis points as of 0906 GMT, completely wiping out large falls seen on Tuesday.

Investors also slashed bets on a Bank of England interest rate cut this year to show a roughly 20% probability, down from 50% a day earlier.

They view Britain as more exposed than many other European countries to an energy price shock due to its weak public finances and its heavy reliance on gas.

The two-year yield GB2YT=RR now stands 46 basis points higher this month, compared with 35 bps for equivalent French and German debt, and 21 bps for U.S. bonds - meaning gilts have underperformed badly.

Investors are focused on developments in the Strait of Hormuz, a key artery accounting ​for about 20% of global oil and gas supply, which has dropped rapidly since the Iran conflict began on February 28.

"The key to determining longer term impact, not just for equity markets but also bond markets and indeed inflation and economic growth, will be unlocking the Strait of Hormuz, which remains practically impassable," said Emma Wall, chief investment strategist at Hargreaves Lansdown, a brokerage.

Finance minister Rachel Reeves is due to answer questions from parliament's Treasury Committee at 0945 GMT.