UK Gilt Yields Drop as US-Iran Ceasefire Eases Oil Prices

The yield on the UK’s 10-year gilt fell by around 20 basis points to 4.65% after oil prices plunged following a two-week ceasefire agreement between the US and Iran, struck just hours before the deadline set by President Donald Trump. Under the deal, the US and Israel agreed to halt their military campaign in exchange for Iran reopening the Strait of Hormuz, offering a temporary but fragile de-escalation in the region, though deeper tensions remain unresolved. In response, traders significantly scaled back their expectations for Bank of England (BoE) rate hikes, now pricing in just one increase for the year, a nearly 30-basis-point retreat from yesterday’s close. This shift mirrors the pullback seen in European Central Bank (ECB) rate bets, though markets still anticipate 33 basis points of hikes overall for 2026.

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.