UK Gilt Yields Rise as Iran Tensions Escalate

The UK’s 10-year gilt yield climbed to 4.85% following a long weekend, moving closer to the multi-year highs seen at the end of last month as hopes for de-escalation in Iran faded after US President Donald Trump threatened more aggressive strikes against the country. The surge in energy prices and rising inflation concerns have prompted investors to revise their expectations for Bank of England policy, now anticipating two interest rate hikes in 2026, a shift from earlier forecasts of fewer increases. Markets remain cautious as investors adopt a "wait-and-see" approach ahead of Trump’s ultimatum for Iran to reopen the Strait of Hormuz and agree to a ceasefire, or face severe consequences.

The UK’s 10-year gilt yield climbed back to 4.8% on Thursday, 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.