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

UK 10-year gilt yields jumped to 5% as growing political uncertainty and the stalemate between the US and Iran over a peace deal drove oil prices higher, bringing inflation concerns to the forefront. UK Prime Minister Keir Starmer sought to reassure critics of his leadership following Labour’s poor performance in local council elections, though his speech lacked new policy proposals. Attention has now shifted to whether a leadership challenge will emerge in the coming days, with Starmer stating he will fight any such attempt and will not step down. Meanwhile, brent crude surpassed $105 per barrel after President Trump dismissed Iran’s latest peace proposal as “totally unacceptable.” The fate of the Strait of Hormuz remains uncertain, with The Wall Street Journal reporting that Iran had offered to dilute some enriched uranium and transfer the remainder to a third country, a claim Iran denied. Markets are pricing in at least two Bank of England rate hikes by December.

UK 10-year gilt yields climbed back above 4.95% as rising oil prices, driven by escalating tensions between the US and Iran, heightened inflation concerns and reinforced expectations of further Bank of England rate hikes. Investors also continued to assess the fallout from last week’s UK local elections. Brent crude surpassed $105 per barrel after President Trump dismissed Iran’s latest peace proposal as “totally unacceptable.” The fate of the Strait of Hormuz remains uncertain, as reports from The Wall Street Journal suggested Iran had offered to dilute some enriched uranium and transfer the remainder to a third country, a claim Iran denied. Domestically, Prime Minister Keir Starmer is set to deliver a key speech on Monday aiming to reassure Labour MPs of his leadership amid heavy election losses and growing speculation of a potential challenge. On the macro front, REC/KPMG data showed hiring for permanent positions in the UK falling at the fastest pace in three months in April.

UK 10-year gilt yields extended their decline to 4.85%, the lowest since April 20, as Prime Minister Keir Starmer pledged to remain in office despite early election results showing significant losses for his Labour Party. Nigel Farage’s Reform UK made gains in English council elections, while Labour lost hundreds of seats, though the decline was less severe than some of the worst-case scenarios. Still, many results are expected to be announced after markets close today and into the weekend. At the same time, optimism over a potential US-Iran peace deal eased fears that persistent inflation could keep interest rates elevated for longer, after President Trump insisted the ceasefire remained "in effect" despite recent clashes. Financial markets still expect the Bank of England to deliver two rate hikes by year-end.