UK Gilt Market Rout Deepens Amidst Rate Hike Bets and Stagflation Fears

The UK gilt market experienced a deepening sell-off on Monday, March 23, 2026, as traders increasingly anticipate the Bank of England (BoE) will need to aggressively raise interest rates to combat surging energy prices and persistent inflation. The moves signal growing concerns about the UK’s economic outlook, potentially facing a period of stagflation.

Gilt Yields Surge to Multi-Year Highs

The 10-year gilt yield climbed to 5.05%, the highest level since 2008, increasing 0.06 percentage points on Monday morning. Since the beginning of the conflict in the Middle East, the 10-year yield has risen by 0.8 percentage points, putting gilts on track for their worst monthly performance since the “mini-budget” crisis of 2022. The two-year gilt yield, more sensitive to interest rate expectations, rose 0.08 percentage points to 4.65% in early trading.

Market Pricing in Four Rate Hikes

Swaps markets are now fully pricing in four quarter-point interest rate increases by the BoE before the end of the year. This represents a significant shift from expectations before the Middle East conflict began, when investors anticipated two rate cuts.

Stagflation Fears Grip the Market

The surge in energy prices is fueling fears of stagflation – a combination of high inflation and slow economic growth – which would constrain the BoE’s ability to lower interest rates to stimulate the economy.

Analysts Weigh In

Derek Halpenny, head of research in global markets for Europe, the Middle East and Africa at MUFG, described the gilt market moves as “starting to look very excessive,” suggesting the expectation of four rate hikes is “way overdone.”

Stephen Jones, chief investment officer at Aegon Asset Management, characterized the situation as a confluence of “stagflation, fiscal slippage and fraught positioning — an unholy trinity.”

Investor Concerns Mount

Investors are also worried about the impact of rising borrowing costs and measures to shield consumers from the energy shock on the UK’s public finances. The volatility has also prompted speculative investors to exit positions, exacerbating the downward pressure on gilt prices.