Gilt Yield Holds Near Two-Month High on Growth and Rate Hike Bets

The UK 10-year gilt yield held around 4.97%, close to the near two-month high reached earlier this week, as resilient economic data and higher oil prices reinforced expectations that the Bank of England will raise interest rates later this year. The UK economy grew 0.1% in May, rebounding from a 0.1% contraction in April, while GDP expanded 0.7% over the three months to May, beating forecasts of 0.5%. Markets now fully price in a November rate hike, with another increase expected by March 2027. The outlook contrasted with comments from BoE policymaker Sarah Breeden, who said the UK's weak economy and labor market reduce the need for further tightening despite the inflationary risks stemming from the Iran conflict. Meanwhile, gilt yields remained below 5% as reports that Home Secretary Shabana Mahmood is set to become chancellor under incoming Prime Minister Andy Burnham eased concerns over a more expansionary fiscal policy.

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.