UK Gilt Yields Post Sharp Monthly Rise on Iran Crisis

The UK’s 10-year gilt yield was poised to close March at 4.85%, near its highest level since July 2008, after surging over 60 basis points, one of the steepest monthly increases among European bonds. The escalating Iran conflict continued to drive energy prices higher, prompting a dramatic shift in Bank of England policy expectations. Adding to the volatility, a Wall Street Journal report suggested US President Donald Trump might end military action against Iran, even if the Strait of Hormuz remained closed. Markets responded by abandoning earlier bets on two rate cuts, now pricing in at least two hikes by 2026, with a 50% chance of a move in April. However, BoE’s Alan Taylor urged caution, emphasizing a "high bar" for rate increases and calling for steady borrowing costs until the conflict’s economic impact is clearer.

The UK’s 10-year gilt yield hovered around 4.9%, near its highest since July 2008, and was set to close March up over 70 basis points. The escalating Iran conflict continued to push energy prices higher, triggering a sharp reversal in Bank of England policy expectations. Investors remained focused on the economic risks of the prolonged Middle East crisis, with reports of US troop preparations for a potential ground operation overshadowing Washington’s claims of diplomatic progress. Markets now price in at least two BoE rate hikes this year, with a possible third, abandoning earlier forecasts of two cuts. However, BoE policymaker Alan Taylor tempered hawkish bets, stating he saw a "high bar" for raising rates and preferred to wait for greater clarity on the war’s economic impact before adjusting borrowing costs.

The UK’s 10-year gilt yield surged back above 5%, its highest since July 2008, and is poised to end March up over 75 basis points, as the Iran conflict drives energy prices higher and prompts a sharp shift in Bank of England expectations from two anticipated cuts to two or three hikes in 2026. Geopolitical tensions escalated after President Trump extended his ultimatum for Iran to reopen the Strait of Hormuz, while conflicting signals from Washington and Tehran fueled skepticism about a quick diplomatic breakthrough, with markets viewing the delay as a tactic to bolster military readiness. On the domestic front, UK retail sales dipped 0.4% in February (both including and excluding fuel), slightly better than feared, but consumer confidence plunged to a near one-year low in March, as concerns over the conflict’s impact on inflation and growth weighed on sentiment.