Bond market turmoil has traders pricing in three Bank of England rate rises

Here's what we need to be telling clients

By Matthew Sellers

03 Sep 2026

A sharp sell-off in government bonds has left investors betting that the Bank of England will raise, not cut, interest rates three times over the next two years — a scenario that would have seemed far-fetched even a few months ago. Two-year gilt yields, which reflect what the market expects to happen to short-term borrowing costs, have climbed past 4.5%, part of a wider rout hitting government debt markets globally. Ten-year gilt yields, meanwhile, have pushed above 5.25% — their highest level since August 2007 — according to data from Trading Economics.

That matters far beyond the trading floor. Gilt yields feed directly into swap rates, and swap rates are what lenders actually use to price fixed mortgage deals - not the Bank Rate itself. When yields jump this fast, repricing usually follows within days.

Why the bond market has turned

The Bank of England has held its Bank Rate at 3.75% since a 6–3 vote at the end of July, and only weeks ago the debate was over how soon the next cut might land.

Two forces appear to be behind the latest shift. First, oil markets remain jumpy because of the prolonged conflict involving Iran, with Brent crude trading near six-week highs as traders weigh continued supply risk in the region, per the same Trading Economics data. Second, and arguably more significant for global bond pricing, newly installed US Federal Reserve chair Kevin Warsh has turned notably hawkish. Warsh said this week that US inflation "has not slowed meaningfully" and that the Fed still has "work to do" - remarks that have markets pricing in a roughly 68% chance of a US rate hike this month. That's pushed US Treasury yields up sharply, and UK gilts have been dragged along with them: UK markets are now pricing a Bank Rate rise in November at close to 70% likelihood, with a further hike by February 2027 seen as around 80% likely.

Analysts have pointed to the UK's particular exposure to inflation shocks given its reliance on imported energy - a vulnerability advisers have heard raised repeatedly since the conflict escalated earlier this year, and reinforced this week by accelerating UK shop-price inflation reported by the British Retail Consortium.

Not everyone is convinced the hikes will actually happen

Not every analyst is on board with a three-hike scenario. RBC Capital Markets analysts, cited in reporting by CityAM, said they struggled to see current pricing being fully realised, while flagging that the risk still skews towards further weakness in bonds rather than a swift recovery. AJ Bell has put more concrete numbers on the hawkish case, pencilling in a first hike in November, a second in February and a third in June — taking the Bank Rate to around 4.5% — with the firm's Dan Coatsworth suggesting some bond buyers may be "playing a waiting game before piling in" while yields keep climbing.

The Bank's own Monetary Policy Committee has previously flagged that a re-escalation between Iran and the US could force its hand. Most economists still expect UK inflation to creep above 3% before easing back towards the 2% target, though the Bank has acknowledged a worst-case scenario in which it tops 4%.

What's already happening to mortgage pricing

Brokers won't need reminding that fixed rates had already reversed course before this latest gilt sell-off. Moneyfacts data shows the average two- and five-year fixed rates rose for the first time since April in July, climbing to 5.63% and 5.66% respectively, while deal shelf-life shrank to just 11 days as lenders repriced on the fly.

This isn't the market's first scare of the year, either. David Hollingworth, associate director at L&C Mortgages, has described how lenders pulled hundreds of products within days when the Iran conflict first drove swap rates up sharply back in March, saying it became apparent that "rates were going to be forced back up" almost as soon as the news broke. Brokers reacting to July's MPC decision were similarly unimpressed by the hold, warning that a widening 6–3 vote split offered little comfort to clients hoping for relief.

How clients tend to react when rate-rise talk resurfaces

This is far from the first time this year that brokers have had to manage client nerves around the prospect of hikes rather than cuts — and the pattern of behaviour is fairly consistent. Gerard Boon, managing director at Boon Brokers, has previously described how swings in either direction leave homeowners under real strain, noting that rate moves keep placing "significant financial and emotional pressure on homeowners." Jade Pinkerton, senior mortgage and protection adviser at Oportfolio Mortgages, frames the trade-off simply for clients weighing up their options: fixing "provides certainty and stability" for those unsettled by the prospect of further rises, while a variable rate suits those who can tolerate the swings.

That anxiety shows up in behaviour, not just sentiment. Rhys Edwards, mortgage consultant at Brooks Mortgages, reported clients trying to lock in deals "months, and in some cases a year" before their existing one expires during an earlier bout of rate-rise fear — a habit likely to resurface if this latest gilt sell-off keeps pushing pricing higher.

What this means for advice conversations

None of this guarantees the Bank of England will actually hike three times, or at all — market pricing has swung wildly in both directions all year, and the Bank's next scheduled decision falls on 17 September. But for anyone with clients approaching a remortgage or nearing the end of a fixed deal, the direction of travel in swap rates over the past fortnight is reason enough to have the conversation now rather than wait and see.

Three questions worth raising with clients this week:

When does their current deal actually end? With shelf-lives shrinking to as little as 11 days, a product seen last week may already be gone — book a rate review sooner rather than later for anyone within six months of expiry.

Fix, or tracker without an early repayment charge? Given the gap that's opened up between fixed and tracker pricing this year, some clients may prefer the flexibility to switch later without penalty, provided they can stomach short-term uncertainty.

Is a shorter fix worth the trade-off? Clients convinced current pricing reflects a temporary spike, rather than a lasting shift, may prefer to fix for two years rather than five and revisit once the geopolitical picture clears.

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