British government bond yields fell to a five-week low on Tuesday as investors’ concerns about the political situation abated and optimism about the US-Iran peace deal dented expectations for rate hikes.
The yield on the benchmark 10-year government bond (gold bond) was 4.85% as of Tuesday, but it fell by about 30 basis points on Friday’s bailout rebound. The 30-year government bond rate also fell by more than 30 basis points last week and continued to ease to 5.552% on Tuesday.
Yields have soared to multi-decade highs in recent weeks after a series of disastrous national local election results for the ruling Labor Party put pressure on Keir Starmer’s premiership.
Mr Starmer has so far resisted calls from around 100 Labor MPs to resign, but now faces a potential leadership challenge from several colleagues, including former health secretary Wes Streeting, former deputy MP Angela Rainer and Greater Manchester mayor Andy Burnham.
Uncertainty in British politics has jittered bond markets as investors consider whether the new chancellor will ease voluntary fiscal rules that limit borrowing and spending.
Before Starmer can be ousted, prediction market favorite Burnham must first win the Makerfield by-election, scheduled for June 18, and become an MP.
Inflation concerns and political instability are putting pressure on gold yields
But Mr Starmer remains in charge for the time being, and his potential challengers have dismissed hopes that he would loosen Britain’s fiscal purse strings and assuage investor concerns.
Yields are also calming on optimism about a possible peace deal between the U.S. and Iran and the rapid reopening of the Strait of Hormuz, which would ease inflationary pressures and reduce the likelihood of future rate hikes.
Giltz has been tracking the decline in euro zone bonds as they returned from the holidays, with the yield on German two-year Bundestag falling more than nine basis points to 2.546% on Monday, its lowest level since May 8.
Pantheon Macroeconomics said in a note on Tuesday that UK government bond investors are holding off on weak economic data released last week.
“Traders are now pricing in one rate hike in 2026 lower than they were at the end of last week, with gold yields posting their biggest weekly decline since late 2023,” it added. “We estimate that the fall in yields was driven by lower oil prices, lower betting market odds on Sir Keir Starmer’s ouster, and Andy Burnham’s promise to maintain current fiscal rules.
“Our model for 10-year yields suggests that the release of the data will have little lasting impact on yields.”
—CNBC’s Holly Ellyatt also contributed to this report.
