UK Gilt Yields on Track for Biggest Weekly Drop Since 2024

UK 10-year gilt yields slipped toward 4.9%, poised for their sharpest weekly decline since 2024 and nearly erasing the previous week’s losses from political turmoil, as weak economic data and US-Iran uncertainty dominated the week. April retail sales plummeted 1.3%, nearly double the forecasted 0.6% decline, while the UK’s budget deficit swelled to £24.3 billion in April, surpassing the £20.9 billion estimate and marking the highest April shortfall since 2020. These figures followed earlier reports of softer-than-expected April inflation, an unexpected cooling in the labor market, and May PMI data signaling a contraction in private sector activity, prompting traders to trim bets on Bank of England rate increases. Meanwhile, US Senator Marco Rubio noted "some good signs" in Iran negotiations, though Tehran’s uranium stockpile and control over the Strait of Hormuz remain major obstacles.

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.