UK borrowing costs jump after Saudi oil output cut

UK borrowing costs jump after Saudi oil output cut

British two-year government bond yields rose to their highest since May 30 on Monday after Saudi Arabia announced its biggest cut to oil production in years over the weekend, bolstering inflation concerns.

Interest-rate sensitive two-year gilt yields rose as high as 4.445% at 0858 GMT and five-year gilt yields hit 4.184%, both up more than 8 basis points (bps) from Friday's close, while 10-year yields were as much as 7 bps higher at 4.226%.

Yields rose by a smaller amount for U.S. and German government bonds, with euro zone purchasing managers' index data coming in below expectations, while its British equivalent edged up from an earlier provisional estimate.

While many economists financial markets expect the U.S. Federal Reserve to keep interest rates on hold next week, they still expect the Bank of England to raise its main interest rate to 4.75% from 4.5% on June 22, and for BoE rates to peak at 5.5% at the end of this year.

"The UK increasingly looks like an outlier on the inflation front which should drive further cross-market underperformance," said Imogen Bachra, head of UK rates strategy at NatWest Markets, who expects the 10-year gilt yield to reach 4.6%.

Short-dated gilts last month suffered their heaviest sell-off