10-year gilt yields surge to 5% amid energy shock; markets now price in multiple BoE hikes by year-end
MARKET INSIDER – British government borrowing costs spiked to levels unseen since the 2008 financial crisis on Friday, March 21, 2026, with the benchmark 10-year gilt yield crossing 5% as investors aggressively repriced inflation risks from the escalating U.S.-Israel war with Iran. The sharp move—up roughly 15 basis points on the day for the 10-year and 19 basis points for the 2-year gilt (to 4.602%)—reflects Britain’s acute vulnerability as an energy importer, where the near-total blockade of the Strait of Hormuz has driven oil and gas prices sharply higher, feeding directly into household and corporate cost pressures.
In the 15 trading days since the conflict began in late February, 10-year gilt yields have climbed about 68 basis points and 2-year yields nearly 97 basis points, underscoring a rapid unwind of earlier rate-cut expectations. Before the war, the Bank of England was widely anticipated to ease policy; now, markets assign near-zero probability to any cut in 2026 and overwhelmingly price in a hike as early as next month, with the key rate seen reaching at least 4.25% by year-end—implying a minimum of two increases. The BoE’s unanimous decision Thursday to hold at 3.75%—while warning of near-term CPI spikes from the “new shock to the economy”—only reinforced the hawkish pivot.
“The trigger is energy, as oil and gas shocks are feeding directly into inflation expectations, and gilts are reacting exactly as you would expect,” said Nigel Green, CEO of deVere Group. “This isn’t a disorderly sell-off—it’s an understandable repricing of risk.” He noted an added political dimension: Chancellor Rachel Reeves’ fiscal framework, built on stability and credibility, faces immediate headwinds from higher debt-servicing costs that narrow her budgetary room just as calls mount for energy relief and household support. Official data showing unexpectedly high February borrowing of £14.3 billion ($19.1 billion) added further selling pressure.
Longer-dated gilts—already the highest in the G7 before the war—saw additional gains, with 20- and 30-year yields rising 9 and 7 basis points respectively. While higher yields restore some value to parts of the curve for investors, volatility is set to remain elevated as long as energy markets dictate the inflation trajectory.
For global investors, the UK gilt rout highlights a broader truth: energy-dependent economies like Britain are bearing the brunt of the Gulf conflict’s economic spillover, with imported inflation forcing central banks into restrictive postures that could choke growth before stability returns. If coalition efforts to reopen Hormuz gain traction or de-escalation signals emerge, the current yield spike could prove temporary—potentially offering attractive entry points in fixed income. But prolonged disruption risks embedding higher-for-longer rates, squeezing Reeves’ fiscal space and amplifying stagflation concerns across Europe. The contrarian view: in times of geopolitical repricing, patience has historically rewarded those who avoid knee-jerk moves, as Polar Capital’s George Godber advised: “Keep calm… the duration of this impact is deeply unknown.”
