UK Gilts Rise as Rate Hike Bets Fade on US-Iran Deal Hopes

UK 10-year gilt yields continued to fall toward 4.9% as investors reduced their expectations for Bank of England rate hikes in 2026, with a potential US-Iran peace deal driving oil prices down and alleviating inflation pressures. Washington sent Iran a one-page memorandum detailing steps to gradually reopen the Strait of Hormuz and lift the US blockade on Iranian ports, with investors awaiting Tehran’s response. Financial markets now anticipate about 50 basis points of tightening, or two rate hikes, by the end of the year, compared to earlier expectations of up to three. Elsewhere, voters across England, Scotland, and Wales are heading to the polls today in elections that will decide control of the Scottish and Welsh parliaments and more than half of England’s councils. The vote serves as a critical test for Prime Minister Keir Starmer, with polls indicating Labour could face setbacks following policy missteps and tax increases.

UK 10-year gilt yields extended their decline toward 4.9% as investors scaled back expectations for Bank of England rate hikes in 2026, with optimism over a potential US-Iran peace deal pushing oil prices lower and easing inflation concerns. Financial markets now price in about 50 basis points of tightening, equivalent to two rate hikes, by year-end, down from up to three hikes priced in earlier this month. According to Axios, the White House is close to a one-page Memorandum of Understanding with Iran to end the conflict and begin nuclear negotiations, the closest the parties have been to a deal since the conflict started. Tehran is expected to respond within 48 hours, though no agreement is finalized. Earlier, US President Donald Trump paused escalation plans, citing progress in talks. Attention is also turning to Britain’s municipal elections on Thursday, with polls suggesting a possible setback for Prime Minister Keir Starmer’s Labour Party.

UK 10-year gilt yields eased to 5.0% on Wednesday as hopes of a US-Iran deal pushed oil prices lower, reducing inflation concerns. While US President Donald Trump paused "Project Freedom" in the Strait of Hormuz, citing progress in talks, he maintained the blockade on Iranian ports. Despite the decline, gilt yields remain near 18-year highs, as investors still anticipate potential Bank of England interest rate hikes due to the prolonged Middle East conflict's impact on already above-target inflation and domestic political pressure. Markets are pricing in at least two quarter-point rate hikes from the Bank of England this year, following last month's decision to hold rates steady. Governor Andrew Bailey described the move as a "difficult judgement call," warning of risks in delaying action. Attention is also turning to Britain’s municipal elections on Thursday, with polls suggesting a possible setback for Prime Minister Keir Starmer’s Labour Party.