ARE UK BONDS STARTING TO LOOK ATTRACTIVE?

03.06.2026 Interest rates on UK 10 year bonds have surged to around 5% on worries about the inflationary impact of the Gulf war and concerns about an increase in borrowing under a new Labour Prime Minister.

Concerns around the inflationary impact of the Gulf war centre on the fact that the oil price is over USD 90 due to the closure of the Straits of Hormuz. This reflects the inability of Iran and the US to negotiate a settlement to end the Gulf War. Pressure is certainly building on Trump as the November mid term elections are fast approaching while gasoline prices are nearing the key phycological level of USD 5. Generally, Trump backs down when faced with adversity.

The other issue worrying UK markets is the potential increase in government borrowing associated with an Andy Burnham premiership. However, in a speech last month he committed to preserving the Reeves fiscal framework. With interest on government debt now approaching 10% of the total budget, managing the Gilt market has become an important part of governing. The perils of not managing it properly are well illustrated by the fate of Liz Truss.

The underlying data for the UK economy is certainly very weak. The most recent labour market data painted a picture of rising unemployment, slowing wage growth and falling job vacancies. Meanwhile the April inflation data suggested that price pressures, outside of energy, are moderating. For example, annual inflation, excluding food and energy, came in at 2.5% while service sector inflation slowed from 4.5% to 3.2%. If it were not for the hostilities in the Gulf, we would be looking at further rate cuts.

So, with a lot of bad news priced into the UK government bond market 10 year bonds, with an interest rate of around 5%, look good value. 10 year bonds, issued by companies, with interest rates approaching 6% are also good value.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin