UK Gilt Yields at 18-Year High on Political and Inflation Risks

The UK 10-year gilt yield eased to around 5.05% as investors assessed the latest inflation and labour-market data for clues on the Bank of England’s policy outlook. Headline CPI rose to 2.9% year-on-year in July from 2.6% in June, matching market expectations, while core inflation remained unchanged at 2.6%. The figures were broadly in line with forecasts and prompted traders to modestly reduce bets on a rate increase before year-end. Recent labour data also pointed to a cooling jobs market, with unemployment unexpectedly holding at 4.9% and payroll employment declining by 86,000 year-on-year. Regular earnings growth was slightly stronger than anticipated at 3.5%. While the UK economy has shown some resilience, elevated oil prices and fading hopes of a US-Iran agreement continue to pose inflation risks. Markets still price at least one BoE hike this year, although most economists expect rates to remain unchanged.

The UK 10-year gilt yield rose above 5.0%, reaching its highest level since July 23, as renewed concerns over the Iran conflict pushed oil prices higher and heightened inflation risks. The move formed part of a broader global bond selloff, although the rise in UK yields was limited by signs of a weakening labour market that could reduce pressure on the Bank of England to tighten policy. Unemployment unexpectedly remained at 4.9% in the three months to June, above the 4.8% forecast, while payroll employment fell by 86,000 year-on-year. Regular earnings growth stood at 3.5%, slightly above expectations. The figures reinforce expectations that the BoE may keep rates unchanged for the remainder of the year, after leaving policy steady in July. Investors are now turning their attention to the latest UK inflation report, which is expected to show headline inflation accelerating to a four-month high, while underlying price growth may ease.

The UK 10-year gilt yield eased to around 5.0%, following lower US Treasury yields as investors continued to monitor developments in the Middle East. Although energy markets started the week relatively calmly, the risk of a prolonged conflict remains a concern for inflation. Despite retreating from its July peak, Brent crude is still around 45% higher since the start of the year. The Bank of England left interest rates unchanged in July, with Governor Andrew Bailey saying the disinflation process remained on track despite external risks. Markets are now focused on the UK inflation report due this week, with expectations pointing to a rise in headline inflation to a four-month high, while the core rate is expected to moderate. In the US, markets continue to scale back expectations of a September Federal Reserve rate hike. Meanwhile, tensions remain elevated after Iran called on Washington to accept defeat, while President Donald Trump warned of persistently high fuel prices.