Telecoms giants Vodafone and Airtel Africa led a FTSE 100 rally on Thursday afternoon, as investors brushed off early losses caused by a steep sell-off in the bond market.

Two-year gilt yields, which gauge short-term interest rate expectations, have jumped above 4.5 per cent, pushing up borrowing costs and putting the UK's economic stability under threat. City analysts have said the UK is suffering from higher gilt yields due to the country's vulnerability to inflation shocks. Higher gilt yields feed through to mortgages, corporate borrowing and government debt-servicing costs, which is why moves in the bond market often matter more for household finances than equity swings.

The Bank of England has set interest rates at 3.75 per cent, yet a cautious tone in previous Monetary Policy Committee meetings has led analysts to believe it could raise borrowing costs as a result of a prolonged Iran war. The Bank's MPC warned in August that it would likely raise interest rates in the event a conflict re-emerges between Iran and the US. In its worst case scenario, inflation could top four per cent, double its two per cent target.

Economists broadly predict UK inflation will creep above three per cent in the coming months before dropping back to two per cent.

Brent crude held firm around $95 per barrel on Thursday after rising for three consecutive sessions, as investors continued to be spooked by the renewal of hostilities in the Middle East alongside weak efforts to reopen the Strait of Hormuz. The Strait of Hormuz is one of the world's most important oil chokepoints, and disruptions there tend to lift energy prices, which in turn feed into inflation and pressure bond markets.

RBC Capital Markets analysts said they struggled to see current interest rate pricing "getting realised", though there were risks of "further weakness". Forecasts were heavily reliant on hostilities in the Middle East simmering out.

A signal from US Federal Reserve chair Kevin Warsh that interest rate hikes could be on the horizon has also led to US Treasuries being sold off at a rapid pace, pulling global yields up.

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