UK gilt yields rose on the 22nd despite cooling inflation, with the 10-year yield reaching 5.0512% at 8:16am local time, up 1.60 basis points from the previous session. June consumer price index data showed inflation rising 2.6% year-over-year, below the 2.7% market forecast. The increase reflects investor concerns over surging oil prices and Prime Minister Andy Burnham's expansionary fiscal policies, including the abolition of value-added tax on household electricity announced after he took office on the 20th.
UK Gilt Yields Rise Across Maturities as Inflation Cools
According to Yonhap Infomax overseas interest rate data (screen number 6531), the UK 10-year gilt yield traded at 5.0512% at 8:16am local time on the 22nd, up 1.60 basis points from the previous session. The 2-year yield rose 1.45 basis points and the 30-year yield increased 0.60 basis points.
The UK consumer price index for June rose 2.6% compared to the same period last year, below the market forecast of 2.7%. The month-over-month decline was 0.2 percentage points. Despite the softer inflation data, gilts faced selling pressure.
Brent Crude Surges Above $90 Amid US-Iran Conflict
Oil prices are blocking investment in gilts. As the United States and Iran continued military clashes for the 11th consecutive day, Brent crude September delivery prices rose above $90 per barrel. The price surged 15.91% last week alone. This could reignite inflation in the UK, which has high energy import dependency.
PM Burnham Abolishes Household Electricity VAT in First Policy Move
Prime Minister Burnham's policy direction is cited as another reason for gilt weakness. After taking office as Prime Minister on the 20th, Burnham stated he would respect existing fiscal rules while "clearly utilizing all flexibility allowed within them." This signals the implementation of active fiscal policy.
Burnham's first policy abolished the value-added tax imposed on household electricity bills. The fiscal loss from the VAT abolition is estimated at £850 million (approximately 1.7 trillion won) in the 2026-2027 fiscal year.
Michael Bell, head of market strategy at RBC BlueBay Asset Management, said "investors are anxious and skeptical about Prime Minister Burnham's commitment to fiscal soundness." He added, "Because he has ambitious spending plans, the UK will eventually face massive tax increases, or otherwise the risk of another UK gilt crisis will grow."
FAQ
What happened to UK gilt yields on the 22nd despite cooling inflation?
UK gilt yields rose on the 22nd, with the 10-year yield reaching 5.0512% at 8:16am local time, up 1.60 basis points from the previous session. This occurred despite June consumer price index data showing inflation rising 2.6% year-over-year, below the 2.7% market forecast.
Why did UK gilt yields increase when inflation data came in below expectations?
The yield increase reflected investor concerns over two factors: surging oil prices as Brent crude rose above $90 per barrel following 11 consecutive days of US-Iran military clashes, and Prime Minister Andy Burnham's expansionary fiscal policies, including the abolition of value-added tax on household electricity announced after he took office on the 20th. The fiscal loss from the VAT abolition is estimated at £850 million in the 2026-2027 fiscal year.
How much did Brent crude oil prices surge last week?
Brent crude September delivery prices surged 15.91% last week alone, rising above $90 per barrel as the United States and Iran continued military clashes for the 11th consecutive day.
