UK Gilt Yields Ease but Post Steep Monthly Rise in July

UK 10-year gilt yields ended July above 5%, rising 28 basis points over the month as a 20% surge in oil prices fueled concerns that the Middle East conflict could reignite inflation and prompt further Bank of England tightening. Investor sentiment was also supported by easing political uncertainty after the UK welcomed its seventh prime minister in a decade, with the new government pledging to maintain fiscal discipline. The BoE voted 6-3 to keep interest rates unchanged in July, with three policymakers backing a rate hike, more than markets had expected. Still, Governor Andrew Bailey downplayed the prospect of an imminent tightening cycle, while some officials suggested rate cuts could return to the agenda if the Iran conflict subsides. Markets now price in one rate hike by year-end. In the US, the Federal Reserve left interest rates unchanged this week, with investors expecting two rate hikes by June 2027 as renewed US-Iran hostilities continue to cloud the economic outlook.

UK 10-year gilt yields edged lower to 4.99% on Friday, tracking a decline in oil prices as energy flows continued through key maritime routes despite limited progress in US-Iran talks. Still, the benchmark yield rose 23 basis points in July, as elevated oil prices fueled concerns over the longer-term inflation impact of the Middle East conflict and boosted expectations for a tighter Bank of England policy stance. The gilt market was also supported by fading political uncertainty, with the UK welcoming its seventh prime minister in a decade and the new government pledging to adhere to fiscal rules. On Thursday, the BoE voted 6-3 to keep rates unchanged in July, with three policymakers favoring a hike against expectations for a 7-2 split. However, Governor Andrew Bailey pushed back against expectations of an imminent tightening cycle, while some officials noted rate cuts could return to focus if the Iran conflict ends. Markets now price in one rate hike by year-end.

The UK 10-year gilt yield held above 5.0%, remaining close to last week's two-month high after the Bank of England voted 6-3 to keep the Bank Rate unchanged at 3.75%, compared with market expectations of a 7-2 split. The BoE warned that higher energy prices are likely to push inflation higher later this year, with risks now tilted to the upside, although the outlook remains highly dependent on developments in the Middle East. Meanwhile, renewed US airstrikes on Iran lifted oil prices and weighed on risk sentiment, while the Federal Reserve added to market uncertainty by leaving interest rates unchanged despite three FOMC members dissenting in favor of a rate hike.