UK Gilt Yields Surge on Political Risks and US-Iran Standoff

UK 10-year gilt yields fell to 5.25%, remaining below the 19-year highs reached earlier this month, as Brent crude eased toward $100 a barrel after recent comments from US President Donald Trump left the door open to diplomacy with Iran and helped ease fears of an imminent supply shock, while stronger regional crude flows have also reduced pressure on physical markets. Traders are slightly paring back expectations for Bank of England rate hikes after policymakers made clear last week that the outlook for inflation, and therefore interest rates, will depend heavily on the path of oil and gas prices in the coming months. Markets currently price around an 80% chance of a hike at the November meeting, while the probability of a second increase by year-end stands at roughly 56%. Meanwhile, investors are turning their attention to next month’s Autumn Budget, with the government reportedly considering plans to expand a new property tax to cover homes worth more than £1.5 million.

UK 10-year gilt yields rose to 5.3% on Friday after falling more than 10bps in the previous session, as investors digested stronger-than-expected retail sales and this week’s central bank decisions. UK retail sales rose 0.5% in August, defying expectations for a 0.2% decline and rebounding from July’s fall. Department stores led the recovery as retailers resolved stock availability issues, suggesting consumer spending remains resilient despite elevated energy prices and the prospect of tighter monetary policy. The Bank of England held rates steady on Thursday and said it would stop selling very long-dated gilts under its quantitative tightening programme, while warning that a prolonged Middle East conflict could prompt tighter policy. The Federal Reserve and Bank of Japan also raised rates this week and signaled scope for further tightening this year. Elsewhere, Brent crude fell for a third consecutive session as concerns over Saudi supply disruptions eased.

UK 10-year gilt yields fell further toward 5.2%, retreating from 19-year highs, after the Bank of England held rates and announced a six-month pause in bond sales under its quantitative tightening programme. UK policymakers voted 6-3 to keep Bank Rate at 3.75% and warned that rates could rise if inflationary pressures intensify due to the conflict in the Middle East. The MPC also unanimously voted to reduce its stock of government bond purchases to zero through a multi-year programme, with sales and maturities averaging £46 billion a year through 2034, below the £50 billion pace expected by markets. The BoE expects inflation to reach twice its 2% target early next year, while raising its third-quarter GDP growth forecast to 0.4%. Meanwhile, the Fed raised rates by 25 basis points yesterday, its first hike since July 2023, and signaled another increase later this year. Oil prices fell for a second consecutive session but remained elevated amid continued uncertainty over the Middle East.