WeekWatch

UK government bond yields continued rising last week, as UK government leadership challenges and international questions increasingly weighed on investor minds.

Starting with the UK, 10-year gilt yields spent most of the past few days above 5%, ending the week above 5.1%. To put that number into context, 10-year gilt yields haven’t breached 5% since 2008.

Meanwhile the 30-year gilt yield ended the week within touching distance of 6%, reaching its highest levels since 1998.

Yields have been trending up since Covid, however, the recent increases have had some specific triggers.

The ongoing public conversation about potentially replacing Sir Keir Starmer as prime minister is creating uncertainty across domestic bond markets. Several candidates are lining up to fill the role (should it become vacant), and there are concerns candidates would look to open the purse strings to secure their position. With UK government finances already tight, any suggestion the government might increase spending will not be welcomed by markets.

Secondly, the UK’s vulnerability to external energy shocks is now well known. With the Iran crisis dragging on, it seems higher energy costs are here to stay for a while. The International Energy Association (IEA) has said the market will remain ‘severely undersupplied’ until October, even if the conflict ends in June.

Positive UK news

The irony of the current struggles is that the UK economy performed quite well in the first quarter.

Figures released by the Office for National Statistics (ONS) revealed that the UK economy (as measured by GDP) rose 0.6% in the first quarter of 2026 – the strongest of any G7 nation.

Services were the big winners over the period, with the vehicle sales and repair trade particularly impressive. According to the Society of Motor Manufacturers and Traders (SMMT), UK new car sales for March were the highest since 2019, breaking 380,000 units sold. Electrified vehicles had their best ever month for sales – topping 196,000 units – accounting for over half of all new cars sold in March.

There are some important caveats to the Q1 GDP figures, however. The UK’s economy has grown at its fastest rate in the first quarter in recent years, with growth subsequently slowing as the year progresses. Secondly, the ongoing political uncertainty could have a detrimental impact on near-term growth. As mentioned, it is already making government borrowing more expensive.

The elephant in the room continues to be the situation with Iran. The Q1 growth figures largely predate the impact of the conflict (which began at the end of February). The inflationary effects have gradually ramped up. This will have a lingering impact on growth as both manufacturing costs and higher selling prices weigh on businesses and consumers.

US inflation

The ONS is due to release the UK’s April inflation figures next Wednesday, but US data provides an indication of what could be expected.

The US Bureau of Labor Statistics (BLS) released the CPI inflation figures for April last Tuesday. It reported that inflation hit 3.8% in the month – above expectations and the highest level since May 2023.

Blame for the rise can be placed squarely on the Iran situation as high prices for oil and gas were the chief contributor. In fact, the BLS noted that core inflation (for all items except food and energy) was just 2.8%. With air fares surging and prices at the petrol pump at their highest levels since the post Covid-inflation shock, this won’t have come as too much of a surprise to consumers.

Still, the figures will make for uncomfortable reading for Republican politicians, aware that inflation is an important issue for voters. The midterm elections are due in November and could see them lose control of one or both houses in Congress, where they currently enjoy slender leads.

It will also make for uncomfortable reading for Kevin Warsh, Trump’s nominee to replace Jerome Powell as chair of the Federal Reserve. Warsh was finally confirmed by the Senate last week. Trump has been vocal in his desire for interest rates to come down. With inflation increasing, that seems unlikely for now.

US treasuries on the move

While still below gilts, recent developments have also seen US Treasury yields come under increasing pressure. Despite being an energy exporter, the inflationary effects of the Iran conflict can take at least some of the blame.

Greg Venizelos, fixed income strategist at SJP, notes: “We’re seeing the market say, ‘even if everything goes back to normal now, we are past the point of no return for inflation’. Reserves won't be replenished before autumn, and a lot of inventories that need to be in place, including by-products like fertilisers, neon, argon, and so on, will take a while to replenish. So, we’re seeing that inflation shock feed through, and now it’s a question of how quickly it can recover, or whether it might get even worse.”

The pressures in the fixed income market helped spook investors towards the end of the week. The S&P 500 hit record highs on Thursday, before a sharp drop Friday morning undid most of the weekly gains.

FCA to review investment firms’ support of bereaved customers

The Financial Conduct Authority (FCA) is looking into how investment companies treat bereaved customers, to assess whether they are getting the right support.

As part of the review, the regulator will examine the customer experience, from the point a death is reported through to the settlement or transfer of investments.

The FCA will contact selected investment firms, including advisers, platforms and wealth managers, from this month. Firms will be requested to demonstrate how they communicate with and support vulnerable customers. The FCA will also assess service standards and how firms handle fees on bereaved accounts.

It follows similar reviews by the FCA in retail banking and the insurance market, where the regulator found bereaved customers often faced unclear processes, repeated information requests and avoidable delays. While good practice was found, the FCA said it was not consistent.

Earlier this year National Savings & Investments had to pay out millions of pounds in compensation to bereaved families after administrative errors led to long delays in payments. As a government-backed savings provider NS&I doesn’t fall within the scope of the FCA.

The regulator will publish the findings of its review later this year, highlighting good practice and areas for improvement.

Government publishes more details for IHT on pensions

The government has released a technical note setting out more detail on how inheritance tax (IHT) will apply to pensions, including most unused pension funds and pension death benefits.

The note, published on 11 May, explains the thinking behind the changes, who and what is in scope, and how the new rules are expected to work in practice. The changes will apply to deaths on or after 6 April 2027.

There is also further detail on the role of personal representatives (PRs), who will be responsible for identifying, reporting and ensuring payment of any IHT due on the deceased’s notional pension property.

Notional pension property generally includes uncrystallised defined contribution pension funds, crystallised drawdown funds, most lump sum death benefits and pension benefits where the member had control over benefit destination.

Pension scheme administrators will have to rely more heavily on information provided by PRs to determine:

• if IHT is payable
• how much tax applies to the pension element
• if benefits can be paid out in full.

Historically, pension providers largely assessed death benefits independently on the estate. Under the new regime, they will require confirmation from the PRs regarding the overall estate position.

This will mean a heavier administrative burden on PRs, who will need to provide pension schemes with the death certificate and confirmation of whether IHT is payable on the estate, among other things.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.