UK 10-Year Gilt Yield Edges Down

The UK 10-year gilt yield fell to around 4.97% as investors assessed stronger-than-expected economic data, interest-rate prospects and ongoing Middle East uncertainty. UK GDP expanded 0.4% quarter-on-quarter in the second quarter, in line with forecasts, following 0.6% growth in the first quarter. June GDP rose 0.3% month-on-month, beating expectations. However, household consumption growth slowed to 0.2% in Q2. On the monetary policy front, the Bank of England left rates unchanged in July, with Governor Andrew Bailey saying the disinflation process remained on track despite ongoing external risks. In the US, recent economic data reinforced expectations that the Federal Reserve may avoid raising rates next month. Meanwhile, uncertainty surrounding the US-Iran conflict and the Strait of Hormuz continued, with little progress reported in efforts to reopen the key shipping route.

The UK 10-year gilt yield fell to around 4.95% as renewed hopes for a deal to reopen the Strait of Hormuz pushed oil prices lower, easing concerns over inflation. Crude declined after Pakistan signaled that the US and Iran were “close to some sort of arrangement” aimed at reducing tensions and restoring shipping through the strategic waterway. The comments offered a more positive assessment after President Donald Trump had toughened his stance toward Tehran, demanding reparations for deaths linked to Iran and domestic protests. Meanwhile, the Bank of England left interest rates unchanged in July, with Governor Andrew Bailey saying the disinflation process remained on track despite external risks. Recent BRC data showed UK retail sales increased 1.3% year-on-year in July, below the 12-month average, suggesting subdued consumer activity, while Barclays data showed household spending rose 2%, its strongest growth of the year.

The UK 10-year gilt yield rose above 5% as a sharp increase in oil prices revived concerns over inflation and the outlook for monetary policy. Brent crude climbed above $89 per barrel as tensions between the US and Iran intensified and prospects for a Middle East agreement became less certain. President Donald Trump has issued tougher demands on Tehran, while Iran continues to seek reparations as part of negotiations to end the conflict. Higher energy costs are particularly concerning for the UK, a net oil importer that has struggled with persistent inflation, increasing expectations that the Bank of England may need to keep rates higher for longer. Markets are now more than fully pricing in a rate hike by December and another by spring. Meanwhile, UK retail sales rose 1.3% year-on-year in July, below the 12-month average, while Barclays data showed consumer spending increased 2%, its strongest growth this year.