Traders bet on UK interest rate rise by Christmas as Middle East conflict sends gilt yields up

Gilt yields soared this morning as fears of rising inflation sent shockwaves through markets, prompting bets on a potential rise in rates later this year.

A jump in oil prices to over $100 a barrel has sent markets into a tailspin, as it raises the chances of a sharp rise in inflation, pushing central banks to tighten policy.

Yields on the two-year gilt jumped as much as 37 basis points to 4.239 per cent. By 10am, it was up 25 basis points at 4.132 per cent. 

Five and 10 year yields were up 18 and 13 basis points, respectively, to 4.306 per cent and 4.765 per cent. Bond yields move inversely to prices.

A global bond market rout prompted by the Middle East conflict has made investors reconsider the path for interest rate cuts.  

Last week, traders slashed the chances of a March rate cut from 80 per cent to around 20 per cent. They now think it is all but certain that the central bank will leave rates on hold at its next meeting.

Traders no longer expect any rate cuts this year, with a growing possibility that the Bank of England will need to raise them later this year.

Markets are also pricing in a roughly 70 per cent chance of the Bank of England raising rates this year, in December, from the current level of 3.75 per cent.

There is a 50 per cent chance the Bank could hike the base rate in November. 

Chris Beauchamp, chief market analyst at IG said increased chances of a raise rate ‘seems odd given the major hit to consumer spending that is about to make itself felt – this is a supply-driven shock not some huge surge in demand.

‘Policymakers may well have learned the wrong lesson from 2021, and risk setting off a much deeper recession if they get too trigger-happy on rate hikes.’

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An increase in rates will have a knock-on effect on mortgage rates, which have already started to creep higher for first time buyers, home movers and those looking to remortgage.

Last week, three major lenders announced plans to raise rates following an increase in ‘swap rates’. 

These are the rates banks pay to secure money for mortgages. When they go up, mortgage rates go up.

The average two-year fixed-rate homeowner mortgage rate on Thursday morning was 4.83 per cent, up from 4.82 per cent on Wednesday, according to Moneyfacts.

The average five-year fixed-rate homeowner mortgage rate on Thursday morning was 4.95 per cent, up from 4.94 per cent on Wednesday.

The FTSE 100 opened in the red, shedding as much as 180 points before trimming losses to trade down 1.3 per cent, or 134 points, at 10,150.

It means that more than £200billion has been wiped off the FTSE All-share since the war started.