Gilts: Iran Shock Kills the Rate-Cut Dream

The speed of the repricing has been remarkable. UK 10-year gilt yields have jumped from roughly 4.23% in late February to above 4.55%, with intraday spikes touching 4.7% — levels not seen since mid-October 2025. That is a 30-basis-point move in a market that was drifting lower just weeks ago.

US Treasuries have followed a similar trajectory but from a lower base. The 10-year Treasury yield climbed from 3.97% on February 27 to 4.27% by March 12. The 2-year yield surged even faster, jumping from 3.38% to 3.76% over the same period, reflecting markets rapidly repricing near-term rate expectations. The Treasury yield curve spread remains positive at 0.55%, but the shape is shifting fast.

The Bank of England's Monetary Policy Committee meets on March 19, and a hold at 3.75% is now near-certain. The more interesting question is what comes next.

A Reuters poll of economists suggests two more cuts this year — to 3.50% — but timing has become deeply uncertain. April was the consensus for the next move; markets now assign less than 50% probability to that date. Some forecasters are beginning to discuss the previously unthinkable: a rate hike. The stagflation risks facing the BoE are no longer theoretical.

The logic is straightforward. UK CPI stands at 3%, already above the 2% target. An energy shock from sustained oil above $90 and a 40% spike in wholesale gas feeds directly into UK household bills, transport costs, and food prices within months. The BoE's mandate is inflation targeting, not growth support. If CPI accelerates toward 4%, holding rates becomes untenable — let alone cutting them.

Contrast this with the Federal Reserve, which has cut from 4.33% to 3.64% since mid-2025 and faces its own energy inflation pressures but from a position of greater policy flexibility. The Fed funds rate at 3.64% sits below the BoE's 3.75%, a reversal of the typical hierarchy that underscores how constrained Threadneedle Street has become.

Why does the Iran conflict hit UK bonds harder than US Treasuries? Geography and energy mix.

The UK imports roughly 40% of its natural gas, with a significant portion linked to global LNG markets that respond immediately to Middle East disruption. The US, by contrast, is a net energy exporter. When oil spikes, American producers benefit even as consumers pay more — the WTI surge past $95 illustrates the scale. Britain has no such offset.

UK wholesale gas prices surging 40% translates directly into Ofgem's energy price cap, which adjusts quarterly. Households already dealing with elevated energy costs from the 2022 shock face another round of bill increases. That feeds into services inflation — the stickiest component the BoE watches.

Mortgage rates have already responded. US 30-year mortgage rates hit their highest since September 2025 this week. UK fixed-rate mortgage pricing, which tracks gilt yields rather than the base rate, will follow. A homeowner remortgaging a £250,000 loan faces roughly £50 more per month for every 25 basis points added to 5-year gilt yields. The housing market, already fragile, absorbs another blow.

The February 2026 bond rally now looks like a false dawn. Global 10-year yields fell broadly that month — US Treasuries dropped 29.5bp, UK gilts fell 29bp, and even European sovereigns rallied on cooling inflation data. Japan was the outlier, with JGB yields climbing 17bp as the Bank of Japan continued its normalisation.

March has reversed all of that and then some. The divergence is now between central banks that can afford to ignore the energy shock and those that cannot. The ECB, with eurozone inflation near target, retains room to cut. The Fed, with energy self-sufficiency, can tolerate temporary price pressures. The BoE has neither luxury. Meanwhile, US Treasury yields are surging ahead of FOMC on the same energy dynamics.