British government bond yields fell to a two-month low on Monday after a preliminary peace deal between the United States and Iran sent oil prices down more than 5%.
Two-year gilt yields dropped more than 8 basis points from Friday's close to 4.15% by 0728 GMT, according to LSEG data, their lowest since April 20, while 10-year yields fell close to 7 bps to 4.77%, the lowest since April 17.
Euro zone government bond yields were down by 4 basis points.
The moves extended a drop on Friday, after U.S. President Donald Trump raised the prospect of a deal to reopen the Strait of Hormuz, and gathered steam on Monday as the U.S. and Iran looked set to sign an agreement in Switzerland on Friday.
While still a framework, the deal marked the biggest breakthrough towards resolving the conflict that has killed thousands and upended energy markets since it began with joint U.S.-Israeli strikes on Iran in February.
"With oil prices at their lowest in months, that helped to ease fears about a wider stagflationary shock. Moreover, investors also became dovish on the future rates outlook," Deutsche Bank analysts wrote in a note to clients.
Even before the latest development, the Bank of England was not expected to follow the European Central Bank's lead from last week and raise interest rates this Thursday.
On Monday, interest rate futures priced in 27 basis points of tightening by the Bank of England by the end of the year, with a quarter-point rate increase not fully priced in until December, compared to nearly 50 bps last Wednesday.
British 10-year government borrowing costs are still around half a percentage point higher than before the conflict, but are down 0.4 percentage points from a post-2008 high of 5.199% struck last month.
