Key facts
- UK 10-year government bond yield rose above 5%, a level not seen since the Iran war began.
- The fragile ceasefire between Iran and the US collapsed, leading to renewed strikes.
- Brent crude oil prices surged over 9% in a single session due to increased conflict likelihood.
- US President Donald Trump reinstated the blockade of Iranian ships in the Strait of Hormuz.
- The UAE reported two tankers were struck by Iranian missiles.
- UK 2-year gilt yields rose above 4.5%, increasing expectations of a Bank of England rate hike.
The UK's borrowing costs have surged past 5% on the 10-year government bond yield, reaching this level for only the third time since the onset of the Iran war. This escalation follows the collapse of a fragile ceasefire between Iran and the US, leading to renewed military exchanges and a significant jump in oil prices.
The yield on the UK's 10-year government bond climbed by as much as seven basis points on Tuesday morning after the US military conducted further strikes on Iranian military sites. The US stated these actions would impose a heavy cost on Iranian forces and degrade their ability to attack commercial shipping. President Donald Trump also reinstated the US blockade of Iranian ships in the Strait of Hormuz, while the UAE reported two tankers being struck by Iranian missiles.
This geopolitical tension has caused Brent crude oil to jump more than 9% in a single session on Monday, its largest daily gain since May 2020. Government bond yields across developed economies have risen, with the 10-year US Treasury yield climbing more than five basis points over Monday.
The sell-off has been particularly pronounced in the UK, where borrowing costs are highly sensitive to developments in the conflict due to the country's reliance on imported energy and persistent underlying inflation. Higher inflation typically leads traders to demand higher interest rates for holding bonds, as it erodes the real returns for bondholders. Investors also anticipate central bank interest rates remaining higher for longer when price rises are stubborn.
Daniel Mahoney, senior UK economist at Handelsbanken, noted that UK gilts have been especially volatile since the start of the Iran War. He expects UK gilt yields to remain the highest in the G7, with potential further market responses to the incoming Prime Minister's choice for Chancellor.