Tuesday 6 October 2026

The long view: a year that reversed itself

Gilts started 2026 on the front foot. In January, yields across the curve fell to their lowest levels since 2024. The 10-year traded around 4.37%, inflation was falling faster than expected, and markets were pricing two Bank of England cuts this year, with the first possibly as early as April. The DMO's plan to issue fewer long-dated gilts added support to the long end, where structural demand from defined-benefit pension schemes has been fading for years.

That backdrop did not survive the US–Iran conflict. The energy shock changed the inflation outlook, and with it the expected path for policy. The 10-year now sits at 5.38%, about 100bp above its January level and 65bp higher than a year ago. Last week it reached 5.5%, the highest since July 2007, and the 30-year traded at 6% for the first time since 1998. UK CPI is back at 3.1%. The Fed raised rates in September for the first time since 2023. Instead of cuts, markets now price around 30bp of Bank tightening by year-end and roughly 90bp by the end of 2027, from a Bank Rate of 3.75%.

The year-on-year moves show what kind of sell-off this has been. The 2-year is up about 69bp, the 10-year about 65bp and the 30-year about 37bp. The front end has done most of the work, which means this has been mainly a repricing of policy expectations rather than a fiscal panic at the long end. The spread between 10- and 30-year yields has narrowed from roughly 80bp to around 53bp over the year. That bear flattening fits a market that worries more about where Bank Rate is heading than about debt sustainability. The 28 October Budget is the event most likely to change that.

Credit spent most of the past two years at historically tight spreads, supported by strong yield-based demand. US high-yield spreads were near multi-year tights of about 270bp as recently as July. The war produced an early bout of widening, but the main damage has come through rates rather than credit. In September, US investment-grade corporates lost about 2.7%. Index yields reached around 6%, a ten-year high, yet spreads only moved out to about 82bp, and high yield sits near 306bp. The losses were concentrated in higher-quality, longer-duration paper, a sign that investors were cutting duration rather than fleeing default risk.

The short view: a pause, not a turn

Today was a quieter session. Yields fell across the curve, but the rally was uneven. The 30-year fell about 4.5bp to 5.91% and the 20-year about 5bp to 5.85%, while the 2-year barely moved, at 4.69%.

That bull flattener reflects the same split as the year as a whole. At the long end, lower oil did the work. Brent slipped back below $100, easing part of the inflation premium in long gilts, and after a September sell-off of more than 20bp, some of the move is position fatigue. The front end stayed anchored because the Bank offered no relief. Catherine Mann said today that above-target inflation looks embedded and that CPI could approach 4% around the turn of the year, just as pay settlements are agreed. That second-round risk is what keeps the 2-year from rallying, whatever happens to oil on any given day.

For credit, the risk is a change in the regime. So far, spreads have absorbed higher yields because companies' earnings are holding up. If oil stays high long enough to squeeze margins, the spread itself would start to reprice, not just the government yield underneath it.

What to watch next: oil headlines tied to the Strait of Hormuz, Bank speakers ahead of the November meeting, and the Budget on 28 October. With borrowing costs where they are, the long end will judge the Chancellor on gilt supply as much as on the headline numbers.