UK 10-Year Gilt Yield Near Four-Month High

The UK 10-year gilt yield climbed back to around 4.55%, remaining close to the near four-month high of 4.59% reached earlier this week, as investors scaled back expectations for further interest rate cuts from the Bank of England this year. Rising geopolitical tensions linked to the Iran conflict have pushed energy prices higher and revived inflation concerns, prompting markets to reassess the outlook for monetary easing. Although oil prices have retreated from peaks above $100 per barrel, the earlier surge has been enough to significantly alter rate expectations. Money markets are now pricing in very little chance of rate cuts this year, a sharp shift from before the conflict, when investors had been anticipating around two reductions. Investors are also turning their attention to upcoming UK economic data, particularly the release of monthly GDP figures on Friday.

The UK 10-year gilt yield dropped 10 bps to 4.49% from a near four-month high of 4.59% in the previous session, as investors grew more optimistic that the conflict would have a smaller impact on inflation than initially feared, reducing expectations for further interest-rate hikes. Markets found some relief as oil prices cooled after comments from US President Donald Trump aimed at calming investors. Trump said the conflict could end quickly and added that the US Navy would escort tankers through the Strait of Hormuz. Oil and European natural gas prices fell, easing pressure on energy markets and inflation fears. As a result, market expectations for Bank of England policy have shifted again, with traders leaning back toward the possibility of rate cuts. Markets are now pricing in about a 50% chance of a rate cut by September, a sharp reversal from the previous session when little change in policy was expected and a rate hike had briefly been priced in earlier in the day.

The UK 10-year gilt yield jumped 16 basis points to about 4.722%, the highest level in five months, as investors sharply revised expectations for Bank of England interest rates following the surge in global energy prices. Oil has climbed above $100 per barrel as escalating tensions in the Middle East disrupted supply and halted shipping through the Strait of Hormuz. Because the UK is highly sensitive to energy costs feeding into inflation, markets quickly shifted their rate outlook. Only a week ago, investors expected around two rate cuts from the Bank of England this year, but those expectations have been reversed. Traders briefly priced in as much as 16 basis points of rate increases by year-end, instead of the 8 basis points of cuts expected previously. Markets now see a meaningful chance of a rate hike later this year and roughly a 20% probability of a hike as early as June.