Short-dated UK gilts suffer one of their worst days on record

By Andy Bruce

MANCHESTER, England, March 19 (Reuters) - Short-dated British gilts suffered one of their worst days since modern records began on Thursday after some Bank of England officials warned of possible interest rate rises, compounding a selloff driven by Iranian attacks on energy infrastructure.

The two-year gilts yield, which moves inversely to the price, ended 30 basis points higher on the day at 4.107%, the highest close since January 2025.

It marked the worst daily performance for the two-year gilt since September 2022, when former Prime Minister Liz Truss' economic plans triggered a full-blown market crisis.

Apart from the so-called "mini-budget" episode, it was likely the worst day for short-dated gilts since the sterling crisis of Black Wednesday in 1992, according to a Reuters analysis that discounted anomalous-looking data by referencing contemporaneous Reuters market reports.

Five-year gilts also suffered heavy losses on Thursday, as losses for long-dated gilts - while still hefty in outright terms - paled in comparison to their short-dated stablemates.

The BoE's nine interest rate-setters voted unanimously to keep borrowing costs on hold at 3.75% on Thursday in the face of inflation risks from the war in the Middle East, and some raised the prospect of having to increase rates.

Iranian aerial attacks since Wednesday have caused extensive damage to the world's largest gas plant in Qatar, targeted a refinery in Saudi Arabia, forced the United Arab Emirates to shut gas facilities and set off fires at two Kuwaiti refineries.

Britain is heavily reliant on imported natural gas, and the rise in gilt yields was far sharper than for German or U.S. bonds.

"Gas plays a larger role in UK electricity versus much of Europe, and the country's gas storage capacity covers just 1% of annual demand - a fraction of the roughly 30% coverage in France and Germany," said Vivek Paul, UK chief investment strategist at BlackRock Investment Institute.

"It leaves the UK vulnerable to sustained price spikes that feed through to inflation rapidly."

After the BoE's announcement, investors priced in 66 basis points of monetary policy tightening by December - indicating a roughly 75% chance of three quarter-point interest rate hikes - up from 21 bps of tightening on Wednesday. Markets largely shrugged off labour market data released on Thursday which showed a bigger-than-expected slowdown in wage growth to a five-year low and a pick-up in hiring. (Writing by William Schomberg and Andy Bruce; editing by Ros Russell, Kirsten Donovan and Hugh Lawson)