UK government bonds just posted their strongest returns in three months, and the catalyst is refreshingly old-school: cheaper oil.
A decline in global crude prices, driven partly by a tentative US-Iran peace agreement, has eased inflation fears enough to make gilts attractive again. The 10-year gilt yield sat at roughly 4.71% on June 25, reflecting a 0.16 percentage point drop from the previous month. For context, yields move inversely to prices, so falling yields mean rising bond returns.
What’s driving the rally
The story starts with oil. Brent crude prices have fallen meaningfully after the US and Iran reached a tentative peace deal, removing one of the biggest geopolitical risk premiums baked into energy markets this year. Cheaper oil flows directly into lower inflation expectations, and lower inflation expectations make fixed-income assets more appealing.
But oil isn’t the only factor pulling gilt yields lower. The UK composite PMI, a closely watched gauge of business activity across manufacturing and services, fell to 49.4 in June. Any reading below 50 signals contraction. In English: the UK economy is shrinking, and that changes the math on what the Bank of England does next.
