On March 19, 2026, the Bank of England (BoE) and the European Central Bank (ECB) both held their interest rates steady amid heightened inflation concerns triggered by the ongoing Iran war, extinguishing hopes for rate cuts this year [1]. The BoE maintained its rate at 3.75%, while the ECB also kept borrowing costs unchanged, as soaring energy prices weighed heavily on policymakers [1]. This decision led to a sharp rise in government bond yields across Europe, with the yield on 10-Year Gilts climbing more than 13 basis points to 4.871%, marking a new 52-week high before easing slightly [1]. The 2-Year Gilts saw an immediate surge of 39 basis points—the largest jump since the September 2022 'Mini Budget'—and were last seen 27 basis points higher at 4.378% [1]. French, German, and Italian bonds also experienced increased yields, though the selling pressure was less severe compared to the UK [1].
Market strategists noted that the BoE's unanimous decision by its nine-member monetary policy committee signals a dramatic shift in policy outlook, effectively ending expectations for further rate cuts this year [1]. Ed Hutchings, head of rates at Aviva Investors, stated that the likelihood of a rate hike from the BoE in the coming months has increased, suggesting investors may tactically overweight gilts in the short term, with at least one hike expected later in the year [1]. Matthew Amis, investment director at Aberdeen Investments, described the situation as a "perfect storm" for Europe's sovereign bond markets, citing spiking energy prices and the BoE's openness to rate hikes as key drivers [1]. He noted that German bunds remain relatively calm but are still approaching 3% yields due to similar inflation fears, and that gilts and bunds are pricing in a much longer conflict, focusing on inflation rather than potential negative impacts on growth [1].
Simon Dangoor, deputy chief investment officer of fixed income at Goldman Sachs Asset Management, indicated that the ECB's next move will likely be a hike, as the governing council remains sensitive to upside inflation risks [1].
Overall, the Iran conflict has created a volatile environment for European government bonds, with surging yields and shifting central bank policy expectations. Investors are now considering tactical allocations in sovereign debt, anticipating further rate hikes and prolonged inflationary pressures [1].
CONCLUSION
The Iran war has significantly altered the outlook for European government bonds, driving yields higher and ending hopes for rate cuts in 2026. Central banks are now expected to consider rate hikes, and investors are repositioning tactically in sovereign debt. The market is bracing for continued volatility and inflation risks.