UK Gilt Yields Surge on Oil Spike, Rate Hike Bets

UK 10-year gilt yields climbed above 4.8%, reaching their highest level since June 19, as crude oil prices rose following attacks on vessels in the Strait of Hormuz. The renewed tensions in the waterway pushed crude back above $72 per barrel, its highest since early July, adding to inflationary pressures. Traders are also increasing bets on Bank of England rate hikes, with a 76% chance of a rise by year-end and over 50% odds for November. Bank of England Governor Andrew Bailey recently reaffirmed that inflation is still projected to hit 2%, albeit later than previously expected, and dismissed the possibility of imminent rate cuts. In political developments, Andy Burnham, the leading candidate to replace Keir Starmer as prime minister, has yet to appoint a finance minister, with former energy minister Ed Miliband emerging as the likely pick.

UK 10-year gilt yields fell toward 4.75%, tracking declines in US Treasury yields after last week's weaker-than-expected US jobs data. Investors reduced bets on a Federal Reserve rate hike this month following the report, which showed fewer jobs added in June, May, and April than anticipated. The recent drop in oil prices, driven by the US-Iran peace deal and OPEC+’s production increase, has also eased pressure on central banks, including the Bank of England, to raise borrowing costs. Markets now see a 70% chance of just one rate rise this year, down from two expected a few weeks ago. BoE Governor Andrew Bailey confirmed last week that inflation remains on track to hit 2%, though later than previously forecast, and ruled out imminent rate cuts. In UK politics, Andy Burnham, the frontrunner to succeed Keir Starmer as prime minister, has yet to name a finance minister, with former energy minister Ed Miliband seen as the likely choice.

UK 10-year gilt yields hovered just below 4.8% as the Bank of England’s dovish stance and weaker-than-expected US jobs data led investors to scale back rate hike expectations for both the UK and US. Despite this, yields rose 6 basis points for the week as traders adjusted positions after the initial drop following the US-Iran deal, with additional upward pressure from rising long-term yields in Japan amid concerns over increased spending. On monetary policy, Bank of England Governor Andrew Bailey maintained a cautious tone, highlighting a slowing UK economy and stating the BoE would not rush to respond to rising oil prices. He noted inflation remains on track to reach 2%, though later than previously expected, while ruling out near-term rate cuts. Meanwhile, Fed Chair Kevin Warsh noted easing inflation expectations but reaffirmed the Fed’s 2% target. US jobs data showed only 57,000 jobs added last month, with unemployment falling to 4.2% as workers left the labor force.