(May 6): Global bonds rallied as speculation about a potential peace deal between the US and Iran drove down energy prices, curbing bets on interest rate hikes as inflation expectations eased.
Ten-year Treasury yields fell as much as nine basis points to 4.34% while equivalent German yields dropped seven basis points. UK gilts led the rally with 30-year yields retreating from their highest level since 1998. Traders slashed wagers on central bank tightening from the Federal Reserve and major European peers as oil prices slid.
The surge across bond markets followed an Axios report that the US and Iran are closing in on a one-page memo to end the war. At the same time, the newswire said that nothing had been agreed upon and that the US is waiting for Iran’s response.
UK debt markets have been hit hardest among peers amid the crisis in the Middle East.
Britain relies heavily on energy imports, leaving it prone to a double-whammy of higher inflation and slower growth from a persistent rise in oil prices. On top of that, local elections on Thursday have put a spotlight on the UK’s messy political landscape, with unpopular Prime Minister Keir Starmer possibly facing a leadership challenge.
See also: Global food prices rise to highest in three years on Iran war costs
A lasting peace deal between the US and Iran could improve the economic backdrop for Starmer, according to Nicolas Trindade, senior portfolio manager at BNP Asset Management.
“If the conflict resolves itself before the next BOE meeting, then I think that potentially we could have a Bank of England that stays on hold for the whole of 2026,” he said. Trindade owns shorter UK bonds, which he says offer protection against political noise ahead of the vote.
Pooja Kumra, senior UK and European rates strategist at Toronto Dominion Bank, recommends buying 10-year gilts at current levels, stressing that most of the risk around local elections has already been baked in to the price.
See also: Countries need to conserve fiscal firepower amid oil crisis: IMF
Oil fell a second day on Wednesday as US President Donald Trump said “Great Progress” has been made on a final agreement to end the war with Iran. Meanwhile, China’s Foreign Minister Wang Yi urged Iran to keep negotiating in pursuit of a lasting truce with the US, as he hosted Tehran’s top diplomat just days before Trump is scheduled to arrive in Beijing.
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