UK Gilt Yields Rise as Oil Rebounds

UK 10-year gilt yields edged up to 4.97% on Tuesday, tracking a rebound in oil prices after Monday's sharp selloff as uncertainty over the US-Iran conflict continued to support demand for risk-sensitive assets. Sentiment improved after US President Donald Trump called off planned strikes on Iran, signaling that a diplomatic solution remained possible, although Tehran denied any ongoing or planned negotiations. Domestically, last week's Bank of England meeting reinforced the view that policymakers are in no rush to tighten monetary policy, leading investors to scale back expectations for interest rate hikes in 2026. The BoE voted 6-3 to leave rates unchanged, with three members supporting a hike, more than markets had anticipated. Still, Governor Andrew Bailey stressed that the disinflation process remains on track, while some policymakers suggested rate cuts could return to the agenda if tensions in the Middle East continue to ease.

UK 10-year gilt yields fell to 4.99% as declining oil prices eased concerns over inflation and the need for higher interest rates. Crude prices dropped on hopes that the US and Iran could reach an agreement to reopen the Strait of Hormuz after the US canceled planned strikes against Iran. President Donald Trump also said negotiations with Tehran would resume on Monday, reducing fears of further escalation in the conflict. Meanwhile, the Bank of England's policy meeting last week reinforced expectations that policymakers are in no rush to tighten monetary policy, prompting markets to scale back bets on interest rate hikes in 2026.

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.