A key driver of the sell-off in government bonds comes amidst fears of rising oil prices, which will likely have a knock-on effect on inflation

Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, part of Raymond James Wealth Management, highlights the recent sell-off in government bonds as rising oil prices and inflation fears cloud the outlook for interest rate cuts, with gilts caught up in the move despite the UK’s planned reduction in bond issuance.

Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, Part of Raymond James Wealth Management, comments: “

We have seen a global sell-off in Government bonds following Trump’s decision to attack Iran over the past weekend. Gilts have not been immune to the sell-off, with the 10-year gilt yield rising over 20bps in a matter of days.  

“A key driver of the sell-off in government bonds comes amidst fears of rising oil prices, which will likely have a knock-on effect on broader inflation, minimising the ability of central banks to cut rates. In addition, fragile fiscal positions are brought back into the spotlight as markets see potential for an increase in defence spending should the conflict persist.

“During the Spring Statement yesterday, Reeves reiterated her aim of fiscal stability, however this did little to unwind the gilt sell-off, which was overwhelmed by the risk of inflation re-accelerating due to escalating conflict with Iran.

“Today we have seen some relief following as the market has digested the announcement by the DMO that the UK is reducing its bond sales to a three-year low of £252.1 billion of bonds in the fiscal year starting April.

“While the drop in supply is good news for bond investors, the overwhelming near-term driver of gilts moves this week has been fears of inflation that could derail further interest-rate cuts from the Bank of England.”