UK Gilt Yields Slightly Up as US-Iran Tensions Reignite Inflation Fears

UK 10-year gilt yields edged up to 4.86% as escalating US-Iran tensions threatened their ceasefire, pushing oil prices higher and reigniting inflation concerns. This ended a five-day rally for UK government bonds, the longest since just before the Iran conflict escalated in late February. Recent weak labor market data, softer-than-expected inflation, and signs of slowing economic activity had led traders to scale back their bets on a Bank of England rate hike, with markets fully pricing in just one increase this year. However, traders slightly raised their bets today as rising oil prices underscored that the crisis is far from over, with a peace deal still out of reach. A Washington official confirmed US strikes on an Iranian drone operation near the Strait of Hormuz, following reports that President Donald Trump had rejected a potential compromise with Tehran. In retaliation, Iran’s Revolutionary Guard targeted a US airbase on Thursday.

UK 10-year gilt yields fell below 4.85%, their lowest level since April 20, as optimism grows over a potential US-Iran peace deal. Investors are closely monitoring Middle East developments, encouraged by the recent absence of negative signals from both sides and persistent hopes that an agreement to ease tensions and reopen the Strait of Hormuz could still be reached despite recent strikes. Traders have trimmed their bets on Bank of England rate hikes, now expecting about 40 basis points of tightening by year-end, with a roughly 50% chance of a hike next month. Market attention is now focused on upcoming speeches from BoE policymakers for monetary policy signals, as well as political developments surrounding Prime Minister Keir Starmer following Labour’s regional election setbacks.

UK 10-year gilt yields fell to 4.85%, their lowest level since April 20, outperforming European peers as markets reopened after the Bank Holiday weekend and processed fresh Middle East developments. Iran reported explosions in the southern port city of Bandar Abbas, while Washington confirmed it conducted "self-defense" strikes targeting Iranian missile launch sites and vessels attempting to deploy naval mines. This followed US President Donald Trump's statement that a memorandum of understanding between the two nations had been "largely negotiated." Meanwhile, recent data revealed contractions in UK private sector activity during May, alongside cooling inflation and a softer labor market, prompting investors to scale back Bank of England rate hike expectations. Market focus now shifts to upcoming speeches from BoE policymakers for monetary policy signals, as well as political developments surrounding Prime Minister Keir Starmer following Labour’s regional election setbacks this month.