Falling oil and gas prices ease inflation concerns; UK gilts lead gains in European bond markets.

UK gilts extended gains across the curve as oil and gas prices fell to intraday lows, with the benchmark 10-year gilt yield dropping nearly 7 basis points. This followed reports that EU officials do not expect the US to ban diesel exports, and that Qatar is holding talks with the US and Iran over the Middle East conflict. The policy-rate-sensitive UK 2-year and 5-year gilt yields both fell 6 basis points, to 4.87% and 4.94% respectively. The German 10-year bund yield dropped 5 basis points to 3.59%. French government bonds underperformed after official data showed France's debt-to-GDP ratio rose to 119% in June. Traders pared back bets on future central bank rate hikes. Rate hike pricing in the December 2027 contract showed the European Central Bank falling 6 basis points to 92 basis points, and the Bank of England falling 5 basis points to 110 basis points. The drop in energy prices to intraday lows was the catalyst for this bond market rally. Brent crude, after previously hitting a recent high above $115 a barrel, fell sharply below the $95 mark to a more than one-month low. The oil price decline was supported by multiple developments: first, EU officials do not expect the US to ban diesel exports; second, Qatar is holding talks with the US and Iran over the Middle East conflict. Concerns over a diesel export ban had previously weighed on European energy markets. The US is the world's largest diesel exporter, with diesel exports to Europe projected to reach 360,000 barrels per day in the third quarter of 2026, up sharply from 250,000 barrels per day before the conflict. Countries such as the UK and the Netherlands are particularly reliant on US diesel imports, with US diesel accounting for 62% to 72% of the two countries' total diesel imports in August. Any export restrictions could deal a major blow to European energy supply, so the EU officials' remarks effectively eased market tensions.