UK gilts descend further as tankers burn, BoE rate hike bets rise

By Andy Bruce

MANCHESTER, England, March 12 (Reuters) - British government bond prices fell again in early trade on Thursday, extending a dire performance for the month on news that two tankers were ablaze in Iraqi waters on Thursday after what appeared to be Iranian strikes.

Five- GB5YT=RR and 10-year gilt yields GB10YT=RR, which move inversely to prices, were up 4-5 basis points on the day at 0823 GMT, on track for their highest close since the start of the U.S.-Israeli war on Iran.

Investors view Britain as more exposed than many other Western countries to an energy price shock due to its stretched public finances and its heavy reliance on imported gas.

The five-year yield, sensitive to change in the outlook for interest rates in the medium term, is up 58 basis points this month - the biggest rise since September 2022 when former Prime Minister Liz Truss announced her ill-fated economic agenda.

Prior to her premiership, October 2003 was the last time 5-year yields rose by so much.

Investors returned to betting on a Bank of England interest rate hike this year as oil prices surged on Thursday, touching $100 per barrel in earlier trading.

Interest rate futures were pricing in a roughly 40% chance of a quarter-point rise in borrowing costs by the BoE in December, compared to expectations of no change on Wednesday.

Despite the plunge in gilt prices this month, investor appetite at sales to the primary market has stayed strong.

An auction of index-linked gilts due in 2049 later on Thursday is the next test of demand, with results due shortly after 1000 GMT.