10-year gilt yields pull back from highest level since 2008
2-year yields drop 25 bps from peak as markets trim BoE bets
Trump tells military to pause strikes against Iran power plants
UK borrowing costs hit harder than peers by US-Iran war
Updates prices and analyst reaction throughout
By David Milliken
LONDON, March 23 (Reuters) - British government bond prices surged on Monday after U.S. President Donald Trump ordered a five-day pause on airstrikes against Iranian energy infrastructure, pushing two-year gilts GB2YT=RR towards their biggest daily gain in nearly a year.
The rally marked a sharp turnaround from days of heavy selling which earlier on Monday had pushed benchmark 10-year gilt yields GB10YT=RR to their highest since July 2008 at 5.118% on concerns that prolonged conflict would push up British inflation and government borrowing.
But less than half an hour after hitting that peak, the yield on the benchmark 10-year gilt had tumbled to 4.895% as the price of the bond rallied.
At 1620 GMT, the 10-year gilt yield was down 6 bps from Friday's close at 4.94%, while the two-year gilt yield was 13 bps lower at 4.45%, its biggest daily fall since April 3.
Earlier in the session, two-year gilt yields had both reached a two-year high of 4.712% and then been on course for the biggest drop in three years, having fallen more than 28 bps from Friday's close to 4.296%.
However, bond prices pared gains after Iran appeared cautious about Trump's claims that a deal could be near.
European sovereign markets "are reacting positively to the Trump headlines, despite the Iranian pushback", said Matthew Amis, investment director at fund manager Aberdeen.
"However, to materially unwind the moves of the last few weeks, we would need to see more than words and clear action, namely ships moving through the Strait of Hormuz."
Aberdeen had been "very tentatively buying UK gilts" since yields passed 5% on Friday, he added.
INVESTORS SCALE BACK BETS ON BOE RATE RISES
Interest rate futures shifted sharply to price in almost three quarter-point rate rises by the Bank of England this year, down from four earlier in the session and in line with their level at the end of last week.
Gilt yields - which directly affect the cost of new government borrowing - are still much higher than before the start of the conflict as markets continue to expect higher inflation as oil and gas supplies will remain disrupted for some time, even if the Middle East conflict is scaled back.
Ten-year gilt yields are around 70 bps higher than at the start of the month and on track for their biggest calendar-month increase since September 2022, when former Prime Minister Liz Truss' budget plans roiled markets.
Benchmark 10-year gilt yields pushed past the 5% barrier to their highest since the global financial crisis on Friday, and have risen around twice as much as U.S. US10YT=RR or German bond yields EU10YT=RR since the start of the conflict.
Prime Minister Keir Starmer told a parliament committee on Monday that the country needed to be ready for the crisis to be prolonged and was due to meet BoE Governor Andrew Bailey and finance minister Rachel Reeves later in the day.
Gilles Moec, group chief economist at French insurer Axa, said British debt had fared worse than its peers because the country was more reliant on foreign investors than in the past and needed to tackle "stubborn inflation which the oil shock is only going to exacerbate".
On Thursday, the BoE forecast inflation would rise to 3.0 to 3.5% in the middle of this year, rather than falling back to 2% as it had forecast last month, and said further interest rate cuts no longer looked appropriate in the immediate term.
(Reporting by David Milliken; Editing by Kate Holton, Alex Richardson and Jan Harvey)
((david.milliken@thomsonreuters.com; +44 20 7513 4034;))
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