UK Gilt Yield Falls as Oil Prices Ease Inflation Fears

UK 10-year gilt yields fell below 5%, hovering at their lowest level since August 14, as falling oil prices raised hopes that the Strait of Hormuz could reopen, easing concerns over inflation. Iran held talks with Oman on reopening the Strait, with Oman’s foreign ministry saying a temporary corridor could be announced soon. Unverified reports also suggested that the US and Iran could reach a new ceasefire agreement in the coming days. Still, gilt yields remain elevated amid expectations for Bank of England rate hikes this year, alongside concerns over persistent inflation and rising government debt. Markets are pricing at least 25 bps of BoE tightening by year-end. UK inflation accelerated to 2.9% in July, its highest level since March, and is expected to rise further toward year-end. Markets will also focus on the government’s first budget under Andy Burnham in October. On Tuesday, Britain unveiled plans to spend £10 billion on lower-cost housing for renters, with a focus on London.

UK 10-year gilt yields remained above the 5% threshold as investors weighed persistent inflationary pressures stemming from still-elevated oil prices, potential fuel supply disruptions, low Eurozone gas inventories, and the prospect of a prolonged Iran conflict. Meanwhile, markets awaited Fed Chair Kevin Warsh’s Jackson Hole remarks on Friday, which could offer clues on the interest-rate outlook. In the UK, money markets continue to price in one Bank of England rate hike by year-end, with another 25-basis-point increase expected by early 2027. Inflation rose to 2.9% in July, its highest since March, while core inflation reached 2.6%. Meanwhile, stronger PMI readings and consumer confidence at a two-year high provided an early boost for new Prime Minister Andy Burnham, though the UK remains vulnerable to renewed inflationary pressure from the Iran conflict.

The UK 10-year gilt yield rose to around 5.06% as higher oil prices reinforced concerns about inflation and the outlook for monetary policy. The increase in energy costs is particularly significant for the UK, a net oil importer that has struggled to bring inflation sustainably back to target. Consumer price inflation accelerated to a four-month high in July, although recent labour-market data pointed to some cooling in employment conditions. Markets continue to anticipate tighter monetary policy, with traders pricing in one Bank of England rate increase by the end of this year and another quarter-point hike by April next year. Rising gilt yields also reflected broader pressure across global bond markets, following a similar move in US Treasuries as the initial boost from the US Treasury’s expanded buyback programme faded.