UK Gilt Yields Fall Amid US-Iran Deal Uncertainty

UK 10-year gilt yields fell to 4.85%, retracing part of Monday’s nine-basis-point rise, as oil prices declined and investors adopted a wait-and-see approach amid uncertainty over Middle East peace efforts. US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu gave differing accounts of a call about the Lebanon conflict, with Trump saying he urged both sides to stop fighting, while Netanyahu’s version was less definitive. This follows reports that Iran paused US talks, demanding an end to Lebanon clashes as part of any deal, though Trump claimed discussions with Iran were advancing quickly. On the monetary policy front, investors are anticipating nearly two Bank of England interest rate increases this year, with the first hike fully priced in for September, as policymakers navigate the dual challenge of rising inflation and a labor market that is showing signs of gradual weakening.

UK 10-year gilt yields climbed back above 4.9%, recovering from over one-month lows, as renewed US-Iran tensions pushed oil prices higher and intensified inflation concerns. Iran’s Tasnim News Agency reported on Monday that Tehran would halt negotiations with the US over Israeli strikes on Lebanon and fully close the Strait of Hormuz, accusing Washington of "violating the ceasefire on all fronts." Over the weekend, both sides exchanged proposals to revise a draft deal to extend the ceasefire and reopen the Strait of Hormuz, though progress remained uncertain. The geopolitical uncertainty prompted investors to modestly raise expectations for further Bank of England rate hikes this year, with markets now pricing in almost two increases, with the first one fully priced in September. Economically, UK house prices fell 0.6% in May, according to Nationwide, a steeper decline than the expected 0.1% and the largest monthly drop since June 2025.

UK 10-year gilt yields rose to 4.85% at the start of June, rebounding from over one-month lows at the end of May, as oil prices surged amid escalating US-Iran tensions. Both nations continued exchanging strikes, with Iran claiming it targeted a US airbase previously used in an attack on a telecommunications tower on Sirik Island, while both sides cited "self-defense." Over the weekend, they exchanged proposals to revise a draft deal aimed at extending the ceasefire and reopening the Strait of Hormuz, though progress remained uncertain. The geopolitical uncertainty has led investors to modestly increase expectations for further Bank of England rate hikes this year. Economically, UK house prices fell 0.6% in May, according to Nationwide, a sharper decline than the expected 0.1% and the largest monthly drop since June 2025, driven by weakening consumer confidence and the Iran conflict’s impact on energy prices.