UK Gilt Yields Extend Decline

The UK 10-year gilt yield fell further to 5.15% on Friday as investors awaited fresh direction from US employment data due later in the day while continuing to digest signals from major central banks. The global bond market found some relief on Thursday after Federal Reserve Governor Christopher Waller eased expectations of a near-term Fed rate hike, while the recent rally in oil prices also lost momentum. Gilt yields nevertheless remain elevated amid concerns over energy-driven inflation and the UK’s fiscal sustainability. Markets are now fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027. BoE Chief Economist Huw Pill said raising interest rates now could reduce the risk of the central bank having to tighten policy more aggressively later to contain inflation, which has risen amid the fallout from the Iran war.

UK gilts recovered from their recent selloff, with the 10-year gilt yield falling to just below 5.2% from a 19-year high of 5.29% reached on Wednesday. Easing energy prices helped temper inflation concerns, prompting markets to marginally scale back expectations for Bank of England rate hikes. Brent crude retreated from six-week highs, while natural gas prices eased from their highest level since January 2023 after US President Donald Trump said the renewed US military campaign in Iran would not last long. Gilt yields nevertheless remain elevated amid concerns over energy-driven inflation, higher interest rates and fiscal sustainability in the UK, despite Prime Minister Andy Burnham’s efforts to reassure markets of the government’s commitment to fiscal discipline. Markets are now fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027.

UK 10-year gilt yields pared early gains to trade just above 5.2% on Wednesday, after touching their highest level since August 2007, as investors digested Prime Minister Andy Burnham’s speech to the House of Commons. Burnham reaffirmed the government’s commitment to fiscal responsibility and debt reduction, while saying the early budget date was intended to limit speculation. Meanwhile, Chancellor John Healey is expected to deliver his first major speech in the role as soon as next week. Elsewhere, Brent crude hovered near six-week highs as traders weighed persistent Middle East supply risks against signs that oil was still reaching the market. Markets continue to price in a 25bp BoE rate hike by year-end, with expectations reinforced by accelerating UK shop-price inflation. In the US, markets are pricing in a 66% probability of a September Fed hike following hawkish remarks from Fed Chair Kevin Warsh and higher oil prices.