UK Gilt Yields Ease but Remain Near Multi-Year Highs

UK 10-year gilt yields eased slightly to 5.35% as oil prices retreated from a two-day rally following reports that the US and Iran were considering a phased agreement that could reopen the Strait of Hormuz. Despite the pullback, gilt yields remain close to multi-year highs as the US-Iran conflict and elevated energy prices continue to fuel concerns over renewed inflationary pressures. Markets continue to price in a solid probability of a 25-basis-point Bank of England rate hike in November. Earlier this week, BoE Deputy Governor Sarah Breeden said it could become “increasingly appropriate” to respond to rising inflation risks by raising interest rates. Deputy Governor Clare Lombardelli likewise said rates may need to rise if energy prices remain elevated, while MPC member Swati Dhingra said inflation expectations were not yet a source of concern. In the US, investors also increased bets on further Federal Reserve rate hikes following hawkish comments from policymakers.

UK 10-year gilt yields were little changed around 5.35%, remaining close to the 19-year highs reached earlier this month, as elevated oil prices and comments from Bank of England policymakers kept monetary policy in focus. Brent extended its recent gains as heightened Middle East tensions clouded prospects for a diplomatic resolution to the US-Iran war. BoE Deputy Governor Clare Lombardelli said rates may need to rise if energy prices remain elevated, unless there is clear evidence of a weaker economy. Meanwhile, MPC member Swati Dhingra said inflation expectations were not yet a source of concern. The latest PMI showed UK business activity continued to expand in September, although growth slowed slightly and fell short of expectations. Markets nevertheless continue to price in a solid chance of a 25-basis-point BoE rate hike in November. In the US, investors also increased bets on further Fed rate hikes following hawkish comments from policymakers and stronger-than-expected PMI data.

UK 10-year gilt yields surged back above 5.3% as oil prices rebounded and investors assessed preliminary September PMI data. Brent crude rose after five consecutive sessions of losses, with uncertainty surrounding US-Iran talks persisting as President Trump threatened further action against Iran while also suggesting that a deal could be reached soon. Meanwhile, the latest PMI survey showed that UK business activity continued to expand in September, although growth slowed slightly and came in below expectations. Despite the softer reading, markets are still pricing in a solid chance of a 25-basis-point Bank of England rate hike in November. In the US, much stronger-than-expected PMI data, pointing to the steepest expansion in business activity in more than five years, combined with a series of hawkish remarks from Federal Reserve policymakers, reinforced expectations of further monetary tightening. The outlook comes after the Fed raised rates last week for the first time since 2023.