UK Gilt Yields Climb as Middle East Tensions Fuel Inflation Fears

UK 10-year gilt yields rose to 4.91% as oil prices surged after another round of US strikes on Iran, with disputes over the Strait of Hormuz’s status intensifying. The US Central Command reported targeting dozens of sites to weaken Iran’s ability to threaten regional shipping, while Iran announced the strait would remain closed "until further notice." The uncertainty heightened inflation concerns, leading investors to bet on further Bank of England rate hikes, with markets pricing in at least one increase this year and a strong chance of a second. On the political front, Andy Burnham is set to become the new Labour party leader when the leadership contest ends on Friday, July 17, and is expected to be officially appointed as prime minister on Monday, July 20.

UK 10-year gilt yields fell to 4.89%, retreating from one-month highs and tracking a drop in crude prices as US-Iran peace talks continue despite recent hostilities in the Strait of Hormuz. Earlier this week, Brent crude had surged to two-week highs after US President Trump declared the Iran ceasefire over, though he noted Tehran’s continued interest in a deal. With the UK more reliant on energy imports than many of its neighbors, its markets remain particularly sensitive to oil price fluctuations. Despite the daily decline, gilt yields rose 10 basis points over the week, driven by expectations of a Bank of England rate hike later this year. Money markets are pricing in at least one increase, with a 25% chance of a second. The shift comes as the UK prepares for a leadership transition, with Andy Burnham poised to become the Labour's leader on Friday, July 17, and set to formally assume the role of prime minister on Monday, July 20.

UK 10-year gilt yields stayed above 4.9%, near their highest since June 10, as traders increased bets on Bank of England rate hikes amid rising US-Iran tensions. Investors also considered US President Donald Trump’s latest remarks, stating that Iran still wants to make a deal "badly." Crude prices hit two-week highs on Wednesday after fresh US strikes in Iran, with Trump declaring the Iran ceasefire over, casting doubt on the peace deal’s stability and boosting inflation concerns. Investors now fully expect a 25-basis-point BoE rate hike by year-end, most likely in December. Politically, Andy Burnham, the frontrunner to replace Keir Starmer as prime minister, has yet to appoint a finance minister, with former energy minister Ed Miliband seen as the likely pick. Sterling’s resilience amid recent political turmoil suggests much of the negative news has already been factored in.