UK Gilt Yields Retreat from Two-Month Highs on Fiscal Optimism

The UK 10-year gilt yield reversed early gains to trade around 4.95%, retreating from near two-month highs as investors welcomed expectations that Andy Burnham, widely expected to be confirmed as the UK's next prime minister on Monday, will appoint a fiscally conservative finance minister. With Burnham's confirmation largely priced in, markets have shifted their focus to his choice for the Treasury amid the UK's fragile public finances. Reports naming Home Secretary Shabana Mahmood as the leading candidate reassured investors, easing concerns that Burnham could instead appoint Ed Miliband, who is viewed as favoring a more expansionary fiscal stance. Meanwhile, rising Middle East tensions have pushed oil prices to one-month highs, reinforcing expectations that the Bank of England will continue tightening policy. Markets now fully price in a rate hike in November, with another expected by March 2027.

The UK 10-year gilt yield edged up to 5%, hovering just below the nearly two-month high reached on Tuesday, as rising oil prices fueled inflation concerns and reinforced expectations of further monetary tightening by the Bank of England. Brent crude climbed to a one-month high amid escalating tensions in the Middle East, with the US blockade of Iranian shipping through the Strait of Hormuz and continued strikes against Iran raising concerns over the stability of global energy supplies. Money markets are now fully pricing in a Bank of England interest rate hike by November, with a second increase expected by March 2027. Investors are also closely monitoring developments in UK politics ahead of Andy Burnham's expected appointment as prime minister on July 20. Attention has turned to his choice of finance minister, with betting markets now favoring Foreign Secretary Yvette Cooper over Ed Miliband, who is widely viewed as supporting a more expansionary fiscal stance.

UK 10-year gilt yields fell back below 5%, though they remained near two-month highs, tracking a decline in US Treasury yields after softer-than-expected US inflation data reduced expectations for Federal Reserve rate hikes this year. However, Middle East tensions raised concerns that rising energy prices could reignite inflation and push interest rates higher, leading markets to increase bets on Bank of England rate hikes. Investors now nearly fully expect two increases in 2026, with a September hike fully priced in. Attention also shifted to UK politics, as Andy Burnham prepares to replace Keir Starmer as prime minister on July 20. The focus is on his choice for finance minister, with Ed Miliband, seen as fiscally expansive, emerging as the favorite. This prospect has unsettled gilt investors, who are already wary of Britain’s fiscal fragility.