10-year Gilts are now over 5% - what happened?

• Gilt yields rose sharply in 2026, with 10-year yields moving above 5% after March’s inflation and political shocks.
• March CPI rose to 3.3%, with energy-sensitive categories driving the inflation pickup and complicating the BOE outlook.
• The BOE turned more hawkish after the Middle East conflict, with markets now pricing 2–3 hikes by end-2026.
• Political uncertainty around PM Starmer has amplified fiscal concerns and added upward pressure to longer-dated Gilt yields.
• Short-and medium-tenor Gilts may suit buy-and-hold investors, while long-dated Gilts may suit traders who wish to take advantage of price fluctuations.

We recently published a piece on Gilts, highlighting some new additions to our centralised bond marketplace, Bondsupermart Live. Since then, yields have climbed higher, with 10-year Gilts yields rising above 5% and 30-year yields hitting recent historical highs. We discuss what drove Gilts yields in recent weeks and how different investors may wish to approach Gilts.

Related article: New on Bondsupermart Live – UK government bonds (Gilts) with yields of over 4%!

How did Gilts yields move?

Gilt yields rose sharply in 2026, primarily following the outbreak of the recent Middle East conflict (Chart 1). The bulk of this increase occurred in March, as the conflict, which began in late February, dramatically changed the inflation and interest rate outlook, and pushed Gilts yields higher across the curve. The subsequent release of March CPI inflation data (on 22 April) further confirmed that inflationary effects were already feeding through, helping to keep yields elevated. More recently, political uncertainty following the Labour Party’s heavy losses in local elections (8 May) pushed yields higher again, with 10-year Gilts yields pushing above 5% (Chart 2).

This upward shift was not confined to the UK. Treasury yields rose across many major economies, as the inflationary effect of the Middle East conflict has increasingly become a global issue, although 10-year UK yields rose by more than their peers (Table 1). As highlighted in our recent analysis, we expect a turn in the interest rate cycle, with multiple central banks poised to hike rates later this year.

Chart 1: Gilt yields rose significantly in 2026, especially from March onward

Table 1: Government bond yields increased across Europe and the US after the Middle East conflict

Inflation risks are still present and are becoming clearer

We think inflation risks remain central to the UK’s interest rate outlook. Latest data showed headline CPI inflation at 3.3% y/y in March, up from 3.0% in February, despite core CPI dipping slightly to 3.1% (February: 3.2%). The upward trend was even clearer every month, with headline CPI rising by 0.6% m/m in March (February: 0.4%).

This inflation uptick can largely be attributed to the Middle East conflict, with higher energy prices already feeding into UK inflation. Breaking down the 3.3% y/y headline figure, the largest changes were observed in two segments – ‘housing, water, electricity, gas and other fuels’ and ‘transport’ - both energy-sensitive in nature (Table 2). Other notable components included liquid fuel prices, which rose +95% y/y and +90.6% m/m, diesel prices, which rose +9.5% y/y and +12.4% m/m, and air transport, which rose +14.5% y/y and +10.0% m/m.

Meanwhile, while core inflation technically eased, it remains elevated and well above the BOE’s 2% target. The declines were primarily due to softer goods inflation, while services inflation generally remained elevated at 4.3% in February and 4.5% in March. In short, the latest CPI reading strengthens the case that UK inflation is no longer moderating cleanly, increasing the likelihood that rate hikes are now back in focus.

Before the conflict, the BOE had held rates in February in a close 5-4 vote (4 voting for a cut), reflecting their expectations that inflation would return to target in April. However, the Middle East conflict pushed the BOE in a more hawkish direction. It then voted 9-0 in March to hold and 8-1 in April (1 voting for a hike). At the April meeting, virtually all voting members cited the Middle East conflict and the resulting upside risks to inflation. Market pricing also continues to imply 2-3 hikes in 2026 (Chart 2).

Table 2: Uptick in inflation driven by segments more directly influenced by energy prices (bolded)

Chart 2: Markets are pricing in 2 – 3 hikes by end-2026

Fiscal and political uncertainty over PM Starmer’s position

As mentioned in our previous article on Gilts, the UK’s fiscal position remains manageable for now, but debt levels remain high and the government’s medium-term consolidation plans will need time to build credibility. Public sector net debt is expected to rise in the near term, while fiscal tightening remains backloaded. The key question is whether the government can stick to its tightening plans thereafter.

As noted above, much of the increase in Gilts yields in 2026 has been inflation-driven, though recent political headlines appear to have amplified the overall uncertainty. Markets appear to be uncertain of whether Starmer could continue implementing his fiscal agenda as PM or whether he (or a potential successor) could face pressures to loosen fiscal policy despite already elevated debt levels. Markets are likely concerned that such loosening of fiscal policy would require even greater supply (issuances) of Gilts to finance additional spending, at a time when the UK is already facing a heavy supply backdrop.

A more constructive scenario would see Starmer stabilise his position and continue advancing his fiscal agenda. In that case, recent political noise could gradually fade, though fiscal uncertainties would likely persist as long as debt levels remain elevated. Importantly, markets would refocus on inflation concerns. With the conflict still ongoing and energy prices already starting to feed through, BOE hikes remain very much on the cards.

Other scenarios could be more uncertain, whether Starmer remains as PM but in a weakened position (regarding his fiscal agenda), or if he is replaced by a successor who might be perceived to have lesser fiscal discipline. Potential challengers to Starmer each have their respective fiscal leanings, but some have previously shown greater willingness to increase welfare spending and less regard for bond markets. In this case, we believe inflation would still remain the main driver of yields, but political uncertainty would likely continue exerting more upward pressure on long-term Gilts until greater clarity emerges.

How to approach UK Gilts for different investors

With inflation picking up yet again and BOE rate hikes already looking likely, short-medium tenor bonds may offer relative stability. These are less sensitive to changes in yields because of their lower duration profile and should see smaller mark-to-market swings even if markets continue to reprice yields upward. We prefer short-medium tenor Gilts and find them best-suited for buy-and-hold investors who wish to earn consistent yields of 4% - 5% (depending on maturity).

Long-tenor Gilts would be more exposed not only to shifts in the BOE’s policy path, but also to changes in inflation expectations, and even term premia resulting from fiscal uncertainties. We note that apart from shorter tenors (< 2 years), the curve has not steepened materially (or even flattened) this year, comparing 2-year and 10-year tenors, or 2-year and 30-year tenors, despite heightened inflation risks and now additional fiscal and political concerns (Chart 3).

For the longest-duration Gilts, even relatively small shifts in yields can translate into large price swings, which is particularly relevant at a time when markets are still trying to assess multiple drivers of yield dynamics. We provide rough estimates of hypothetical 1-year gains or losses below, if yields rise or fall by up to ± 100 basis points (Table 3). These longer-duration bonds are hence perhaps more suited for traders seeking to take advantage of price fluctuations, rather than buy-and-hold investors.

Chart 3: Gilts curve did not materially steepen in May (except shorter tenors)

Table 3: Scenario analysis if yields shift by up to ±100 bps

Table 4: Gilts on our platform

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in all of the UKTs mentioned above. The analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.