Yields on U.K. government bonds fell to five-week lows on Tuesday as investor concerns about political developments eased and optimism for a U.S.-Iran peace deal helped scale back expectations for interest rate hikes.
The yield on the benchmark 10-year bond, or gilt, stood at 4.85% on Tuesday, having eased by around 30 basis points in a relief rally on Friday. The interest rate on the 30-year gilt also fell over 30 basis points last week and continued easing on Tuesday to 5.552%.
Yields spiked to multi-decade highs in recent weeks after a set of disastrous nationwide local election results for the governing Labour Party put Prime Minister Keir Starmer’s premiership under pressure.
Starmer has so far resisted calls to resign from almost 100 Labour MPs, but he now faces potential leadership challenges from several colleagues, including his former Health Secretary Wes Streeting, his former deputy Angela Rayner and Greater Manchester Mayor Andy Burnham.
The uncertainty in British politics has put bond markets on edge as investors consider whether a new PM will loosen self-imposed fiscal rules limiting borrowing and spending.
Before potentially ousting Starmer, prediction markets’ favorite Burnham must first win a by-election in Makerfield scheduled for June 18 to become a Member of Parliament.
Gilt yields have come under pressure amid inflationary fears and political instability
But Starmer remains in charge for the immediate future and his potential challengers have dismissed expectations that they would loosen the U.K.’s fiscal purse strings, helping to ease investor concerns.
Yields have also calmed as optimism over a potential peace deal between the U.S. and Iran and a rapid reopening of the Strait of Hormuz, which, if agreed, would lessen inflationary pressures and reduce the likelihood of interest rate hikes in future.
Gilts tracked euro zone bonds lower upon returning from the bank holiday, with German 2-year Bund yields having fallen more than 9 basis points to 2.546% on Monday, marking their lowest level since May 8.
Pantheon Macroeconomics said in a note on Tuesday that U.K. gilt investors are looking past weak economic data published last week.
“Traders now price one rate hike fewer in 2026 than at the end of the previous week, and gilt yields saw the biggest weekly drop since late-2023,” they addded. “We estimate that lower yields were driven by lower oil prices, a fall in betting-market odds on Sir Keir Starmer being replaced, and Andy Burnham committing to maintain current fiscal rules.
“Our model for 10-year yields…suggests the data releases had little lasting effect on yields.”
— CNBC’s Holly Ellyatt also contributed to this report.
