FX.co ★ UK Gilt Yields Surge on Rate Hike Bets

UK 10-year gilt yields climbed back above 5%, reaching their highest level since May 21, as the escalating conflict in the Middle East fuelled concerns that rising energy prices could push inflation and interest rates higher. Two-year gilt yields also advanced, moving above 4.4%—their highest in nearly two months—after rising almost 13 basis points on Monday.

The moves came as the US military continued strikes against Iran, following President Donald Trump’s decision to reinstate a blockade on Iranian shipping and propose a 20% fee for safeguarding the Strait of Hormuz, further intensifying uncertainty over global energy supplies.

Money markets responded by increasing expectations of tighter monetary policy from the Bank of England, now almost fully pricing in two rate hikes in 2026, with a September increase seen as a certainty. In the US, Federal Reserve Governor Christopher Waller cautioned that the central bank may need to raise interest rates “in the near term” if inflation remains above its 2% target. Investors are now focused on upcoming remarks from Federal Reserve Chair Kevin Warsh and the release of US inflation data later today.