Surging energy prices create perfect storm for UK bonds

British government bonds are on course for their biggest monthly fall since 1994, as surging energy prices create a perfect storm of higher inflation, tighter monetary policy and the prospect of greater government borrowing, Qazet.az reports.

Yields for interest-rate sensitive two-year gilts - as well as for 10-year bonds which factor in longer-term concerns about inflation and debt issuance - have jumped by more this month than any month since May 1994 when there was a slump in prices known as the 'Great Bond Massacre'.

"What we see right now is a market that is seriously concerned about the levels of inflation, the persistence of inflation, the stickiness of inflation, and to what extent this means that we may have a fairly restrictive monetary policy," said Theo Chapsalis, fixed income strategist at Morgan Stanley.

Two-year gilt yields touched their highest since November 2008 on Aug. 24 at 2.959%, up from 1.72% at the start of the month, and offered their biggest yield premium relative to German bonds since 2005. Thirty-year gilt yields hit the highest since 2014.