UK Gilt Yields Ease as Iran War Hopes Temper Rate Hike Fears

The UK’s 10-year gilt yield fell toward 4.75%, retreating from multi-year highs, as optimism grew for a swift resolution to the Iran conflict, reducing concerns over surging energy costs and aggressive Bank of England rate increases. US President Donald Trump’s statement that the US could withdraw from Iran "in two or three weeks," deal or no deal, fueled cautious optimism, though Washington’s inconsistent messaging continues to sustain uncertainty in the war’s fifth week. Markets have revised their BoE rate hike expectations, with investors now pricing in fewer than two increases in 2026, down from four projected in mid-March. Earlier forecasts of two pre-conflict rate cuts have been abandoned.

The UK’s 10-year gilt yield dipped below 4.85%, pulling back from multi-year highs, as investors reassessed growth risks tied to the energy shock from the escalating Iran conflict. Despite the late-month easing, yields remained on track to close March up 60 basis points, one of the steepest monthly increases among European bonds. The geopolitical crisis has pushed energy prices higher, triggering a major repricing of Bank of England policy expectations. Markets now anticipate at least two rate hikes by 2026, a stark reversal from earlier bets on two cuts. However, BoE policymaker Alan Taylor struck a cautious tone, setting a "high bar" for rate increases and advocating for steady borrowing costs until the conflict’s economic fallout becomes clearer.

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.