UK Gilt Yields Fall as Inflation Pressures Ease on US–Iran Deal Hopes

UK 10-year gilt yields reversed early gains to slip back toward 4.8%, their lowest level since April 17, as renewed optimism over a potential US–Iran agreement helped ease inflation concerns and supported fixed-income markets. The rally in UK government bonds extended to a seventh consecutive session, marking the longest winning streak since just before tensions escalated in the Iran conflict in late February. Sentiment has also been underpinned by recent domestic data showing a cooling labor market, softer-than-expected inflation, and signs of slowing economic activity, prompting traders to scale back expectations for a Bank of England rate hike. According to Axios, US and Iranian negotiators have reached a memorandum of understanding aimed at extending a ceasefire by 60 days and initiating talks on Iran’s nuclear program, though final approval from US President Donald Trump is still pending.

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.