FX.co ★ UK Gilt Yields Fall as Hormuz Hopes Ease Inflation Concerns

UK 10-year gilt yields fell back below 5%, hovering near their lowest level since August 14, as declining oil prices lifted hopes that the Strait of Hormuz could soon reopen, easing inflation concerns. Iran has held talks with Oman on reopening the waterway, and Oman’s foreign ministry indicated that a temporary corridor could be announced shortly. Unverified reports have also suggested that the US and Iran may reach a new ceasefire agreement in the coming days.

Even so, gilt yields remain elevated, reflecting expectations of further Bank of England rate hikes this year, as well as worries over stubborn inflation and rising public debt. Markets are currently pricing in at least 25 basis points of additional BoE tightening by year-end. UK inflation accelerated to 2.9% in July, its highest rate since March, and is expected to push higher toward the end of the year.

Investors will also be watching the government’s first budget under Andy Burnham in October. On Tuesday, the UK announced plans to allocate £10 billion for lower-cost rental housing, with a particular emphasis on London.