UK gilt yields and rate hike bets ease on hopes for end to Iran war

LONDON, April 1 (Reuters) - Yields on British government bonds fell sharply on Wednesday and investors scaled back their expectations for Bank of England interest-rate hikes after U.S. President Donald Trump signalled the Iran war could come to an end soon.

The fall in UK borrowing costs was sharper than for European and U.S. government debt, the flipside of a dramatic surge in gilt yields for much of the period since the war began on February 28.

Two-year gilt yields GB2YT=RR, sensitive to interest-rate expectations, fell as much as 24 basis points to 4.169%, the lowest in two weeks, shortly after markets opened and were down by around 7 bps at 0825 GMT.

Five-year gilt yields GB5YT=RR were down by about 14 basis points at 4.326%, the lowest since March 18, before inching higher to around 4.377%.

Longer-dated bond yields also fell with 10-year yields GB10YT=RR touching their lowest since March 18 at 4.782% and 30-year yields GB30YT=RR down 8 bps on the day.

Paul Dales, chief UK economist at Capital Economics, said British gilts were falling more sharply due to a reversal in oil prices, offsetting bets on high UK inflation and aggressive interest rate hikes from the BoE.

Investors see Britain as more exposed to an energy-price shock than many other European countries due in part to weak public finances, which could come under further strain if the government seeks to provide support for households.

Interest-rate futures were fully pricing in one 25 basis-point increase in the BoE's bank rate by the end of 2026 and the possibility of a second compared with two or three hikes on Tuesday.