Market Insights May 18, 2026

Soaring yields put markets back under pressure

Last week, international bond markets experienced a renewed phase of tension, marked by a sharp rise in long-term sovereign yields. This movement was driven primarily by fears of a rebound in inflation fuelled by higher energy prices, against a backdrop of heightened geopolitical tensions surrounding the Strait of Hormuz and risks to global oil supply.

In several major economies, long-term interest rates even moved above the peaks reached during the 2022–2023 inflation episode. Nevertheless, the risk of a lasting inflation overshoot still appears relatively limited at this stage, as economic fundamentals remain broadly consistent with a gradual disinflation trend, particularly if geopolitical tensions were to ease.

This correction in bond markets could therefore begin to offer attractive entry points on long-duration bonds. In the short term, however, rising yields remain a source of pressure for risky assets and argue for a cautious stance toward equity markets.

United Kingdom: under renewed pressure from bond markets

A new phase of uncertainty is unfolding in the United Kingdom. Following the debacle in the local elections, pressure has intensified on Keir Starmer to leave Downing Street, fuelling concerns over a political shift to the left.

Markets were quick to punish this deterioration in the political backdrop. For several years, the United Kingdom has been operating in a fragile environment, characterised by weak growth, persistent inflation and elevated public debt. Against this backdrop, the Labour government has failed to meet its commitments to reduce spending, further complicating the situation. Sterling weakened, while Gilts came under significant pressure: the 30-year yield rose above the levels reached during the shock triggered by Liz Truss’s mini-budget in 2022, even touching highs not seen since 1998. The international comparison is scarcely more favourable: UK yields remain the highest in the G7 and, since the start of the Iranian conflict, have risen by roughly twice as much as German yields.

The very high level of interest rates is hardly good news for an economy whose growth is already fragile. It is likely to weigh on corporate investment, credit and household confidence, increasing the risk of a more pronounced slowdown in activity. In this context, a prolonged political transition would only deepen the malaise.

In the short term, UK assets are likely to remain under pressure, particularly domestically exposed equities. However, a change in leadership could also help clarify the economic trajectory, closer ties with Europe, a revision of the fiscal framework, albeit with limited room for manoeuvre given the level of debt, and a broadening of the tax base, and, once uncertainty has subsided, could again become supportive for sterling and UK assets. We prefer to remain cautious on the London stock market and, in the meantime, continue to favour companies with significant international exposure, which benefit from sterling weakness.

This week’s figure: 0.5 %

Swiss GDP grew more strongly than expected in the first quarter of 2026, rising by 0.5% compared with the previous quarter. Economic activity was primarily supported by investment and domestic consumption, while exports continued to suffer from the strength of the Swiss franc.