Gilt yields gyrating sharply

At Tricio we focus on economic cycles, market structures and investor behaviour in order to help clients navigate markets with a medium to long-term investment outlook. We often use charts as a gauge of investor sentiment and behaviour. The charts below are a snapshot of the disruption in the gilt market since the US launched their war on Iran.

Other bond markets have seen yields rise sharply as well, but it does seem that gilt prices are in a bit of a free fall. The chart below is the weekly chart of the 2-yr. gilt yield with13 and 50-week moving averages. The Bank of England base rate is at 3.75% and up until the US war the 2-yr. gilt yield was flirting with dropping to 3.5%. Now? Near 4.7% this morning and eyeing a break of the red line (4.75%) and risk a push towards the 2023 yield high near 5.75%.

Is the Bank of England really about to hike rates by 100 bp or more? Probably not, unless inflation readings really kick higher over the coming months. Many different things could happen over the coming weeks. US Pres. Trump announcing a 5-day halt to plans to bomb Iran’s energy infrastructure this morning has seen the 2-yr. gilt yield slide by over 25 bp lower to 4.45% Gilts are pricing in a lot of central bank activity, and if the war ends over the coming weeks and energy prices fall sharply, yields may fall back to pre-war levels.

The chart below is the long term chart of the 10-yr. gilt yield with 13 and 50-week moving averages. The push above the 5% area today is setting up clear risk of further yield gains above 5.5% (2007 peak) or even above 5.80% (1999 peak). Both of the previous yield peaks came when the economy was roaring along though. Still, the chart is highlighting a very nervous market.

Don’t be too surprised if the gilt market gets more jittery to see official responses at some stage. With gilts trading off war headlines and energy price spikes, a lot of the levers seem out of the UK’s control. For now, plenty of risk for higher yields is clear, but for those who think that the market sell off is overdone, higher gilt yields may prove to be the ‘low hanging fruit gift basket’ of 2026! A breakout of peace and lower energy prices? Back to 4.4% and eyeing a drop to 4% in time.

For further information on our research insights and our ‘Ask a Buddy’ CIO service please contact us at info@tricio-advisors.com 

Gerry Celaya,

Chief Strategist