UK Gilt Yields Rise as US-Iran Tensions Take New Turn

The UK 10-year gilt yield climbed back to 4.752% on Monday as renewed tensions between the US and Iran unsettled markets. Oil and gas prices surged after the US Navy seized an Iranian vessel and Tehran responded by firing at ships and closing the Strait of Hormuz again, reversing hopes of a reopening. Brent and WTI futures jumped around 6%, erasing much of Friday’s decline. Traders have added roughly six basis points to expectations for Bank of England rate hikes this year, though only one increase remains fully priced in. Political risks are also weighing on gilts as controversy grows over Prime Minister Keir Starmer’s appointment of Peter Mandelson as US ambassador. Starmer is set to address parliament on the issue, while further scrutiny is expected as officials involved in the vetting process prepare to give evidence.

The UK 10-year Gilt yield fell to 4.749% as Bank of England policymakers signaled no urgency to raise interest rates, as optimism grew that the war in the Middle East may be near an end. Governor Andrew Bailey said it is too early to assess the full impact of the Iran war, describing it as a major energy shock and noting that its duration will be key for inflation. Also, policymaker Megan Greene said markets were right to scale back expectations for aggressive rate hikes. The conflict is expected to weigh heavily on the UK economy, pushing up borrowing costs and inflation, with forecasts now pointing to levels well above the central bank target. Policymakers face a difficult balance between inflation risks and slowing growth ahead of their April 30 meeting. However, recent data showed the economy was gaining momentum before the conflict, with GDP rising 0.5% in February, well above expectations.

The yield on the UK’s 10-year gilt climbed to 4.74%, reflecting a cautious market balancing optimism over US-Iran peace talks against persistent economic risks. While mediators reported progress in extending the ceasefire, and US President Donald Trump suggested a possible breakthrough, uncertainty lingers after Washington announced plans to deploy 10,000 additional troops to the region. The continued closure of the Strait of Hormuz is keeping energy costs and inflation elevated, prompting markets to price in two Bank of England interest rate hikes this year. Investors are also watching today’s meeting between UK Chancellor Rachel Reeves and US Treasury Secretary Scott Bessent at the IMF-World Bank Spring Meetings in Washington. The discussions come after Trump’s recent comments to Sky News heightened tensions and cast doubt on last year’s trade deal. On Tuesday, Reeves issued her strongest criticism yet of Trump’s Middle East conflict, emphasizing its harmful economic consequences.