UK government bond yields fall sharply after inflation data

LONDON, March 25 (Reuters) - British ​government ⁠bond yields fell sharply on Wednesday, ​with 10-year borrowing costs moving further away from Monday's post-2008 high, as investors digested ​February ‌inflation data and the latest developments in the war in the Middle ⁠East.

Ten-year gilt yields dropped 11 basis points from ⁠Tuesday's close to 4.839% ​at 0824 GMT, a sharper decline than the 5-6 bp drop seen for German and U.S. 10-year bonds and down more than 25 ​bps ‌from Monday's peak of 5.118%.

Official data out on Tuesday showed British consumer price inflation held at 3.0% in February, its lowest since March 2025, although a sharp rise looks almost certain as ​the closure of the Strait of Hormuz has pushed up oil ‌prices by around 50%.

Two-year gilt yields, which are sensitive to expectations for Bank of England interest ‌rates, dropped 12 bps to 4.339%, while 30-year gilt yields fell 11 bps to 5.46%.

Financial markets are pricing in two or three quarter-point interest ​rate rises by the BoE this year to tackle inflation risks from higher ‌energy prices, though many economists think the central bank will not raise rates because of headwinds to growth and employment from the increased ⁠energy costs.

James ⁠Smith, developed market economists at ING, ‌said market pricing for BoE rate hikes "looks extreme" and that market expectations were "likely being distorted ​by poor ​liquidity in the swaps market."

"We don't think it ‌is at all clear the bar for rate hikes has been met, at current levels of oil and gas prices," he said. (Reporting by David Milliken, editing by Andy BRuce)