UK Bonds Under Pressure as Trump’s Iran Stance Sparks Sell-Off

The UK’s 10-year gilt yield climbed back to 4.8%, edging toward its highest level since July 2008, after US President Donald Trump’s pledge of more aggressive strikes on Iran dashed hopes of de-escalation. While Trump stated that the US operation was nearly complete, his vow to intensify actions, including potential attacks on electrical plants, over the next two to three weeks deepened investor concerns. With no new rationale for the war and mounting uncertainty, inflation fears have driven markets to revise Bank of England policy expectations. Investors now foresee two interest rate hikes in 2026, reversing four days of reduced bets that had left expectations below two hikes as of yesterday. Still, this remains below last week’s peak, when markets briefly priced in four increases. The shift comes despite Bank of England Governor Andrew Bailey’s recent warning that markets were overestimating the likelihood of hikes.

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.