British government bond yields moved lower on Thursday, reaching levels not seen since April 17 as market participants pared back short-term expectations for further Bank of England rate hikes.
At 1407 GMT the two-year gilt yield had fallen 4 basis points to 4.103%. The five-year yield eased by nearly 2 basis points to 4.238%, while the 10-year gilt held close to the three-month low of 4.6755% that it touched on Wednesday.
Market observers said the decline reflects a tug-of-war between two predominant influences. In the words of Des Cooney, Financial Consultant and Retirement Planning Specialist at Axis Financial Consultants:
"Today’s moves in US and UK bonds show that markets are still being pulled between two forces: easing energy-price pressure on one side, and uncertainty over inflation and central bank policy on the other. Lower oil prices have taken some of the immediate heat out of inflation expectations, which has helped gilts in particular, but investors are not yet ready to call the all-clear."
Forward-looking market pricing has shifted noticeably. Financial markets now do not fully price in a quarter-point Bank of England rate increase until March 2027, while the probability of a rate move by December 2026 stands at approximately 80%.
The pattern among short-dated gilts largely tracked moves in U.S. and German government bonds, reflecting global repricing of near-term rate expectations. By contrast, longer-dated gilts underperformed, lagging international counterparts by about 2 to 3 basis points.
Taken together, the data and market signals point to a near-term easing of pressure on inflation expectations driven in part by lower energy costs, yet they also highlight persistent uncertainty over how inflation and central bank policy will evolve.
Investors and portfolio managers therefore remain attentive to economic indicators and central bank communication that could prompt a re-acceleration in yields or alter the timeline for policy tightening.