UK Gilt Yields Near 18-Year High on Mounting Inflation Fears

UK 10-year gilt yields approached 4.9%, close to their highest level since 2008, as escalating US-Iran tensions and surging oil prices intensified concerns over inflation. Diplomatic efforts remain stalled, with no new peace talks scheduled and both sides locked in a dispute over the Strait of Hormuz. President Trump extended the April 7 truce indefinitely, awaiting a new proposal from Iran, though Iranian officials have ruled out immediate negotiations, pushing Brent crude above $103 per barrel. Domestically, Morgan McSweeney, former chief of staff to Prime Minister Keir Starmer, will testify next week regarding allegations over the vetting of Peter Mandelson. Labour MP Jonathan Brash intensified pressure on Starmer, arguing that the Mandelson scandal has crippled governance and made the PM’s resignation unavoidable. On the fiscal front, the UK’s March budget deficit reached £12.6 billion, the lowest for March since 2022 but still exceeding the forecasted £10.4 billion.

UK 10-year gilt yields declined to 4.86%, though they remain near multi-year highs, as investors weighed the latest Middle East developments and UK inflation data for their potential impact on the Bank of England’s policy direction. US President Trump extended the Iran ceasefire indefinitely, maintaining the US naval blockade in the Strait of Hormuz but signaling potential flexibility. Pakistan, mediating talks, urged restraint, while Iran’s Tasnim news agency reported signs of possible US concessions. On the economic front, UK headline inflation for March rose to 3.3% from 3.0% in February, primarily due to higher petrol prices influenced by the Iran conflict. Core inflation softened to 3.1% from 3.2%, slightly below expectations, while services inflation increased to 4.5% from 4.3%. Market participants have modestly scaled back their expectations for Bank of England rate hikes this year, now pricing in around 39 basis points of increases, still implying two hikes.

UK 10-year gilt yields approached 4.85% as investors processed Olly Robbins’ testimony before the Commons Foreign Affairs Committee and monitored US-Iran negotiations ahead of President Trump’s unmovable Wednesday deadline. Robbins, dismissed by PM Keir Starmer over the Peter Mandelson ambassador scandal, testified that he faced pressure to approve Mandelson’s appointment but had no direct contact with No. 10 during the vetting process. Adding to the uncertainty, Iran’s state broadcaster IRIB denied reports that an Iranian delegation had traveled to Pakistan for talks with the US, contradicting earlier claims. Meanwhile, President Trump accused Iran of "numerous" ceasefire violations, further straining tensions. On the economic front, the latest UK jobs data revealed slowing wage growth, an unexpected drop in unemployment, and a decline in vacancies, though its market impact was limited, as the figures predate the outbreak of war and fail to reflect current labor market conditions.