UK 10-Year Gilt Yield Inches Down

UK 10-year gilt yields dipped toward 4.75%, hitting their lowest since mid-April, as traders scaled back expectations for Bank of England rate hikes following weaker-than-expected UK inflation data and a continued drop in oil prices. Annual CPI held steady at 2.8% in May, falling short of economists’ forecasts for a rise to 3%. However, the services sector saw a faster increase, climbing to 3.7% from 3.2% in April and surpassing the 3.6% estimate. The core inflation rate rose less than expected, edging up to 2.6% from 2.5%. Oil prices, meanwhile, reached fresh three-month lows amid growing expectations of a US-Iran deal this week. Markets now anticipate just 25 basis points of rate increases for 2026, equivalent to a single hike by December. Before the conflict in Iran, the BoE had been expected to cut rates this year. However, the surge in crude prices, still well above pre-war levels of $65 per barrel, disrupted those plans, exposing the UK’s susceptibility to energy shocks.

UK 10-year gilt yields fell to 4.8%, touching their lowest since April 17, as oil prices dropped sharply on the prospect of a preliminary US-Iran peace deal. A framework agreement, including lifting the US blockade and reopening the Strait of Hormuz, is set to be signed in Switzerland on Friday, though unresolved details remain around Iran’s nuclear program. Meanwhile, markets widely expect Bank of England interest rates to remain at 3.75% in a split vote on Thursday, as policymakers balance inflationary pressures against a weakening jobs market and sluggish economic growth. Traders have scaled back their bets, now pricing in just one rate hike this year, with a quarter-point increase not fully priced in until December. Additionally, Thursday’s special election in the Makerfield constituency may influence expectations around Labour leadership and future fiscal strategy, with Andy Burnham indicating he would enter any leadership contest if he wins this week.

UK 10-year gilt yields tumbled below 4.8%, hitting their lowest since mid-April, after US President Donald Trump suggested a US-Iran deal could come as soon as this weekend, though Tehran has yet to confirm. Yields have been volatile, moving in line with oil prices and war-related developments, as traders weigh the risks of a prolonged Strait of Hormuz closure. The longer the disruption lasts, the higher the chance that elevated energy prices will fuel broader inflation, potentially compelling central banks to implement significant rate hikes. Meanwhile, UK GDP shrunk 0.1% in April, the first monthly drop since August, casting doubt on further Bank of England tightening. Investors are also focused on the June 18 Makerfield by-election, where Labour’s Andy Burnham, a potential successor to embattled Prime Minister Keir Starmer, could signal a shift toward looser fiscal policy.