UK bond yield curve bull flattens as oil prices retreat amid geopolitical tensions

(1) UK government bond yields fell across the board on Monday, with the long end leading the decline and the curve showing a bull-flattening trend. Over the past two weeks, economic data was mixed: weakness in the labor market and slowing growth were offset by inflation meeting expectations and a surprise rise in the services PMI. (2) September UK gilt futures climbed to around 86.50 near cash market open, up approximately 28 ticks from Friday’s settlement price. The 2-year yield fell about 1 basis point to around 4.34%, while the 10-year yield dropped approximately 1.5 basis points to 5.04%, narrowing the 2-year/10-year spread by about 0.5 basis points. (3) Oil prices remain a core variable affecting sovereign bond trends. Brent crude is currently about $93 per barrel, down about 1.4% on the day. Since the outbreak of the US-Iran conflict, the correlation between oil prices and UK government bonds has significantly increased. However, if the UK economic outlook deteriorates further, this relationship may weaken. (4) The market is watching for details on a new round of US economic sanctions against Iran to be announced later today by the US Treasury Secretary, as well as fiscal consolidation measures, including spending cuts, growth promotion, and expanded debt buybacks, to address high borrowing costs and debt pressures.