UK Yields Rise as Investors Await Healey Speech

The UK 10-year gilt yield was little changed at 5.15% as investors digested Chancellor John Healey’s first major speech ahead of the Oct. 28 budget. Healey pledged to maintain fiscal discipline and restore the UK’s credibility in international bond markets, while also outlining plans to boost regional growth by using institutions including the National Wealth Fund and British Business Bank to attract private investment. Higher borrowing costs, fueled by renewed inflation concerns amid the US-Iran war and uncertainty over Prime Minister Andy Burnham’s spending plans, are eroding the government’s fiscal headroom and raising expectations for tax increases in the budget. Meanwhile, oil prices approached seven-week highs after US strikes on Iranian oil tankers, while UK firms increased full-time hiring in August for the first time in four years. UK house prices, however, fell year-on-year for the first time since November 2023, Lloyds data showed.

The UK 10-year gilt yield edged higher to 5.16% on Monday as investors awaited UK Chancellor John Healey’s first major speech ahead of next month’s budget announcement. Meanwhile, oil prices moved closer to seven-week highs after the US struck three Iranian oil tankers over the weekend, destroying one, while Tehran threatened to establish a new restricted zone outside the Strait of Hormuz. Higher oil prices have been a key driver of the global bond selloff, leaving UK gilts particularly vulnerable. On the data front, UK firms increased full-time hiring in August for the first time in four years, according to a closely watched REC survey. The figures will be of particular interest to Bank of England policymakers as they assess the strength of the labor market. Meanwhile, UK house prices fell year-on-year for the first time since November 2023, according to Lloyds data.

The UK 10-year gilt yield remained slightly below 5.15%, down from recent 19-year highs, amid a decline in oil prices. Investors were also assessing stronger-than-expected US employment data while positioning for the outlook for monetary policy. US nonfarm payrolls rose by 162,000 in August, significantly exceeding market expectations for a 56,000 increase and prompting markets to price in a near 60% probability of a Federal Reserve rate hike this month. In the UK, markets are fully pricing in a Bank of England rate hike by year-end, with another increase expected by March 2027, amid persistent concerns over inflation and the UK’s fiscal sustainability. BoE Chief Economist Huw Pill said that 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.