UK Gilt Yields Surge to 2008 Highs on Inflation Fears

UK 10-year gilt yields rose to 5%, nearing levels last seen in 2008, as stalled US-Iran negotiations and the effective closure of the Strait of Hormuz heightened inflation concerns and strengthened expectations of a tighter Bank of England policy. The geopolitical tensions have added pressure on markets, with Brent crude trading above $111 per barrel after US President Donald Trump rejected Iran’s proposal to delay nuclear talks until the conflict and shipping disputes are resolved. Domestically, Prime Minister Keir Starmer faces a critical vote on whether to launch an investigation into his assurances that due process was followed in appointing Peter Mandelson as US ambassador. The scrutiny comes as the Bank of England prepares for its Thursday meeting, where policymakers are expected to hold rates steady amid the Middle East crisis. However, markets continue to price in two quarter-point rate hikes for 2026.

UK 10-year gilt yields climbed to 4.94%, approaching 2008 levels, as oil prices surged with the Strait of Hormuz effectively blocked and US-Iran peace talks stalling over the weekend. Iran proposed reopening the strait and ending the conflict, but with nuclear negotiations postponed after US President Donald Trump canceled a delegation’s trip to Pakistan for Iran talks. Investors are also preparing for a week of critical economic data and central bank decisions. The Bank of England is expected to hold rates steady, following last week’s UK inflation report, which showed CPI rising 3.3% year-over-year in March, driven by soaring motor fuel prices, prompting markets to shift from pricing in one rate hike this year to at least two, with a potential third. Politically, uncertainty looms ahead of the May 7 local elections, compounded by mounting pressure on Prime Minister Keir Starmer over his controversial appointment of Peter Mandelson as US Ambassador.

UK 10-year gilt yields pulled back slightly but stayed above 4.95%, approaching levels last seen in 2008, as traders ramped up bets on Bank of England rate hikes. Escalating crude prices and mounting inflation fears are driving the shift, with businesses now expecting CPI inflation to hit 4% over the next year, up from 3.5% in March, according to the Bank of England’s Decision Maker Panel. Firms also plan to raise prices by 3.8%, though wage growth is forecast to slow. Optimism briefly lifted markets after reports that Iranian Foreign Minister Abbas Araghchi would arrive in Islamabad on Friday, reigniting hopes for progress in US-Iran negotiations. However, Brent crude is still on track to end the week 14% higher, reflecting limited progress in peace talks. On the domestic front, UK retail sales unexpectedly rose by 0.7% last month, reinforcing expectations for BOE rate hikes, with markets now fully pricing in two quarter-point increases in 2026 and considering a third by year-end.