The global bond market is undergoing a profound reassessment of expectations. Spurred by a hawkish pivot from the Bank of England, traders have completely priced out the possibility of Federal Reserve interest rate cuts by 2026, with some investors even beginning to hedge against the scenario of rate hikes within the coming months.

On Thursday, the Bank of England's Monetary Policy Committee unanimously voted to hold rates steady while warning it stands "ready to act" against inflation risks heightened by the Middle East conflict. This language triggered a chain reaction: UK government bonds were sold off, sending the two-year gilt yield soaring over 35 basis points in a single day to 4.46%. The sell-off spread to European bond markets and subsequently pressured U.S. Treasuries, with the two-year Treasury yield rising 11 basis points to 3.89%.

Simultaneously, an unexpected drop in U.S. weekly jobless claims data further weakened the rationale for the Fed to maintain an accommodative stance. The swaps market has now removed all expectations for Fed easing this year, and trading volume in Treasury futures amplified significantly as yields climbed.

Less than three weeks ago, the market consensus anticipated a rate cut from the Bank of England at this meeting, given persistent weakness in the UK labor market. However, the situation reversed sharply. Brent crude oil surged past $118 per barrel on Thursday, posing a significant imported inflation threat for energy-dependent economies like those in Europe and the UK.

Bank of England Governor Andrew Bailey stated clearly that monetary policy must "respond to the risks of more persistent inflationary pressures from UK CPI inflation." The swaps market is now pricing in three 25-basis-point rate hikes from the Bank of England this year, with the first move potentially as early as next month.

The market narrative has shifted dramatically within just a few weeks, moving from "when will rates be cut" to "whether rates will be hiked." The speed and magnitude of this change have exceeded prior expectations.