UK 10-Year Gilt Yields Surge to 2008 Highs

UK 10-year gilt yields approached the 5% mark, nearing levels not seen since 2008, as traders increased their bets on Bank of England rate hikes amid escalating crude prices, fueled by stalled US-Iran negotiations, and mounting inflation concerns. Businesses surveyed by the Bank of England now expect CPI inflation to reach 4% in the year ahead, up from 3.5% in March, according to the central bank’s Decision Maker Panel. Firms also anticipate raising prices by 3.8%, though wage growth is projected to slow. Market optimism about a diplomatic resolution to the conflict has waned following the collapse of a two-week ceasefire and the failure to resume talks. Meanwhile, UK retail sales unexpectedly grew by 0.7% last month, driven by petrol stockpiling amid soaring prices. The data has reinforced expectations of near-term interest rate hikes, with investors now fully pricing in two quarter-point increases in 2026 and assigning a 50% chance of a third hike by year-end.

UK 10-year gilt yields rose above 4.95%, 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. 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 data 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. April’s PMI showed UK business activity rebounding after March’s war-induced slowdown, but the uptick partly reflects firms stockpiling supplies amid fears of price spikes and shortages.

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.