Gilt yields near Mini Budget highs after hotter-than-expected UK inflation

Two year gilt yields have risen to 4.48%, the highest level since last September’s peak

Valeria Martinez
clock • 2 min read
Gilt yields near Mini Budget highs after hotter-than-expected UK inflation

Gilt yields have soared to levels not seen since the Mini Budget following the release of worse-than-expected UK inflation data this week and the prospect of a higher terminal rate.

The UK headline Consumer Prices Index (CPI) rate of 8.7% in April surprised to the upside, despite falling from 10.1% in March. The reading was above both economist expectations of 8.2% and the 8.4% projection from the Bank of England earlier this month. 

While the headline figure fell, core CPI rose to its highest level since 1992, at 6.8% versus the forecast 6.2%, adding to fears inflation is becoming entrenched and forcing markets to increase their terminal interest rate predictions.

The two-year gilt ended the day up by 23.7 basis points (bps) at 4.35%, according to data from MarketWatch, approaching the highs found during the Liz Truss Mini Budget fallout, which triggered a mass sell-off of UK assets, while the ten-year yield was up 5.6bps at 4.21%. 

Gilt yields have continued to rise and at the time of writing on 25 May, two-year gilt yields had risen to 4.48%, the highest level since 27 September 2022's 4.61% peak, while ten-year yields are at 4.33%, closing in on its 4.51% peak from the same day, according to data from MarketWatch.

Excluding the Mini Budget period, the increase of two-year gilts is on track to be the largest weekly rise since June 2008.

The sell-off was reminiscent of the Truss era, according to AJ Bell head of investment Alena Kosava, who said the real worry for markets and investors at this point is the potential need for the bank to turn more hawkish and further tighten monetary policy.

This comes at a time when the bank was widely considered to be nearing the end of the tightening cycle, she added. 

Markets are now pricing three full rate hikes this year, and possibly a fourth, bringing the forecast terminal rate as high as 5.5%, a considerable rise from an expected peak of 4.8% at the end of last week, and the current 4.5% level.

The prospect of a terminal rate well beyond previous expectations brings senior fixed income strategist at Saxo Bank Althea Spinozzi's focus to the front of the yield curve, which she said will remain under pressure in the following months.

"If two-year gilt yields break above the 4.68% level, they will find resistance next at 5.57%, a level last seen in June 2008," she said. 

"Following the events of last fall, it is clear that the financial system cannot take rates that high yet; hence, it is safe to assume that the central bank will not allow rates beyond 5% and step in to cool off the sell-off earlier than that."

Read more: 41% of IFAs more stressed after Mini Budget than GFC

More on Investment

Gangbusters? Why the UK market is not exceptional, yet

Gangbusters? Why the UK market is not exceptional, yet

‘Every market turnaround has to begin somewhere’

Laith Khalaf
clock 22 May 2024 • 4 min read
Navigating the intergenerational wealth shift with tokenisation

Navigating the intergenerational wealth shift with tokenisation

'Already gaining significant traction in fund management'

Stephen Ashurst
clock 21 May 2024 • 3 min read
Future of Investment Festival: Ten key reasons for advisers to attend

Future of Investment Festival: Ten key reasons for advisers to attend

Last call to financial advisers to join us on 5 June

Professional Adviser
clock 21 May 2024 • 2 min read

In-depth

Advisers should not be social media stars… but should learn from them

Advisers should not be social media stars… but should learn from them

‘Engaging with new formats is not a vanity project for advisers anymore’

Justin Cash
clock 21 May 2024 • 4 min read
Do you really think the young are bypassing advice by choice?

Do you really think the young are bypassing advice by choice?

We could use a bit more empathy when it comes to future clients

Hope Coumbe
clock 20 May 2024 • 4 min read
Editor's View: Stepping things up ahead of the 31 July deadline

Editor's View: Stepping things up ahead of the 31 July deadline

The editor's Friday Night Takeaway from 17 May

Hope Coumbe
clock 17 May 2024 • 1 min read