UK Gilt Yields Pare Losses Amid Middle East Impasse and Weak PMI

UK 10-year gilt yields trimmed early losses to trade nearly unchanged at 4.97% as the Middle East conflict deadlock pushed oil prices higher and added to inflationary pressures. Iran’s Supreme Leader has reportedly issued a directive that the country’s near weapons-grade uranium should not be sent abroad, hardening Tehran’s stance on a key US demand at peace talks. Investors also assessed economic data and its potential impact on monetary policy. A PMI survey showed the UK economy contracted in May, ending a 12-month streak of growth, amid rising political uncertainty and the growing impact of the Middle East conflict. Businesses reported falling output, surging inflation, supply shortages, and job cuts. The weak PMI followed earlier data showing April inflation came in below expectations and the jobs market unexpectedly softened, complicating the Bank of England’s task as it is expected to raise interest rates at least twice this year.

UK 10-year gilt yields fell to 4.95%, pulling back from multi-year highs, as investors digested S&P Global flash PMI data and Middle East developments. The survey revealed the UK economy contracted in May amid rising political uncertainty and the escalating impact of the Middle East conflict, with businesses reporting falling output, surging inflation, supply shortages, and job cuts. The contraction followed earlier data showing April inflation undershot expectations and the jobs market weakened unexpectedly, complicating the Bank of England's policy path as it is expected to deliver at least two rate hikes this year. Brent crude held near four-year highs after President Donald Trump said Iran negotiations were in the "final stages" but warned of renewed military action if Tehran rejected his terms. In the UK, Chancellor Rachel Reeves prepared to announce cost-of-living measures, though a proposed cap on essential grocery prices was abandoned following industry backlash.

UK 10-year gilt yields fell below 5.1% as investors further reduced their bets on Bank of England rate hikes following weaker-than-expected UK inflation data. Headline inflation dropped to 2.8% in April, below the 3.0% forecast and the lowest since March 2025, after the UK energy regulator introduced a price cap on April 1. Both services and core inflation also undershot expectations, though fuel inflation surged to a 2022 high amid the conflict in Iran. This follows Tuesday’s jobs report, which signaled a labor market slowdown: the unemployment rate rose unexpectedly to 5% in Q1 2026, regular wage growth hit its weakest level since late 2020, and job vacancies dropped to their lowest since 2021. Markets are now pricing in just two BOE interest rate increases by December. Still, gilt yields remain close to multi-year highs as US-Iran talks to reopen the Strait of Hormuz and end the war remain stalled, keeping crude prices at four-year highs.