UK Gilt Yields Near May Peak on Inflation Fears

UK 10-year gilt yields climbed back to 4.94%, close to their highest level since May 21, as renewed Middle East hostilities stoked fears of a prolonged Iran conflict and pushed oil prices higher, adding to inflation concerns. Brent crude surged over 4% after Iran and Israel exchanged missile strikes, despite calls from President Trump for both sides to cease hostilities and pursue peace talks. Market expectations shifted, with traders now fully pricing in two Bank of England rate hikes this year. However, dovish Monetary Policy Committee member Alan Taylor, who backed the 8-1 decision to hold rates in April, stated that current interest rates are "quite restrictive" and saw no need for further increases to address inflationary pressures. On the economic data front, permanent staff placements fell at the sharpest rate in 10 months in May, with firms citing low confidence and rising costs, according to REC/KPMG data.

UK 10-year gilt yields rose back above 4.9%, following US Treasury yields higher after stronger-than-expected US jobs data reinforced expectations of tighter Federal Reserve monetary policy. Nonfarm payrolls surged by 172,000 in May, easily exceeding the expected 85,000, leading markets to fully price in a Fed rate hike by year-end. Investors also processed political developments as Greater Manchester Mayor Andy Burnham announced his intention to challenge Keir Starmer for the UK prime minister role, marking the first time he has confirmed such ambitions. Starmer responded by stating he would not step down. Burnham’s leadership bid hinges on winning the June 18 Makerfield by-election, which would secure him a parliamentary seat and eligibility to contest the leadership. On monetary policy, markets anticipate nearly two Bank of England rate hikes this year, with the first likely in September.

UK 10-year gilt yields stayed below 4.9% after oil prices fell and investors adopted a cautious stance, awaiting progress in Middle East peace efforts. Concerns linger over US-Iran negotiations, particularly Iran’s enriched uranium program and the fragile Lebanon ceasefire, though some investors hope for broader de-escalation in the US-Israeli conflict with Iran. Domestically, Greater Manchester Mayor Andy Burnham announced his intention to challenge Keir Starmer for the UK prime minister role, the first time he has confirmed such ambitions. Starmer responded by stating he would not step down. Burnham’s bid depends on winning the June 18 Makerfield by-election, which would secure him a parliamentary seat and eligibility to contest the leadership. On monetary policy, markets expect nearly two Bank of England rate hikes this year, with the first likely in September, as policymakers balance rising inflation against early signs of a cooling labor market.