UPDATE 1-UK bond yields fall to two-month low on US-Iran preliminary deal

British government bond yields fell to a two-month low on Monday after a preliminary peace deal between the United States and Iran sent oil prices down more than 5%.

Two-year gilt yields dropped more than 8 basis points from Friday's close to 4.15% by ‌0728 GMT, ⁠according ⁠to LSEG data, their lowest since April 20, while 10-year yields fell close to 7 ​bps to 4.77%, the lowest since April 17.

Euro zone government bond yields were down by 4 ​basis points.


The moves extended a drop on Friday, after U.S. President Donald Trump raised the prospect of a deal to reopen the ​Strait of Hormuz, and gathered steam on Monday ⁠as the ‌U.S. and Iran looked set to sign an agreement ​in Switzerland ​on Friday.

While still a framework, the deal marked the ⁠biggest breakthrough towards resolving the conflict that has killed thousands ​and upended energy markets since it began with ​joint U.S.-Israeli strikes on Iran in February.

"With oil prices at their lowest in months, that helped to ease fears about a wider stagflationary shock. Moreover, investors also became dovish on the future rates outlook," Deutsche Bank analysts wrote in a note to clients.

Even before the latest ‌development, the Bank of England was not expected to follow the European Central Bank's lead from last week and raise ​interest rates ​this Thursday.

On Monday, ⁠interest rate futures priced in 27 basis points of tightening by the Bank of England by the end of the year, with a quarter-point rate ​increase not fully priced in until December, compared to nearly 50 bps last Wednesday.

British 10-year government borrowing costs are still around half a percentage point higher than before the conflict, but are down 0.4 percentage points from a post-2008 high of 5.199% struck last month.