Monthly Bond Commentary - May 2026

Political and geopolitical instability dominated financial markets in May. The decimation of the ruling Labour party at local elections paved the way for a leadership contest in the UK. Hard left candidates circling Prime Minister Kier Starmer's stoked an already twitchy bond market and pushed the UK-US 10yr spread ('moron premium') towards financial crisis-era extremes. Meanwhile hotter than expected inflation prints in the US are pushing the Fed under newly instated Chairman Kevin Warsh to hike interest rates for the first time since summer 2023. This is all against the backdrop of the mixed signals from the White House around the ending of hostilities in Iran which whipsawed Brent to over $120 a barrel and down to current levels below $80.

Seemingly we are now at the end of the US-Iran war after nearly 40 such declarations from Donald Trump. However, this time does seem to have legs as concessions are being made by both sides. Unsurprisingly, yields plummeted on the news with Gilts rallying harder than Treasury's. Gilt yields had jumped 80bp since the start of the war versus a smaller 63bp jump in Treasury's given the UK's more precarious fiscal situation and exposure to international energy markets - both now trade c40bp higher than before the war. Despite volatility in rates credit markets remained strong with spreads falling in all sectors, most notably subordinated financials. Moreover, bond issuance is continuing at lightning. Primary corporate bond issuance to the end of May is 22% higher than last year and the second highest on record behind 2020.