UK borrowing costs have fallen to their lowest level since April after the US and Iran announced a deal paving the way for an end to the war.
The yield on 10-year gilts, a benchmark for what the Treasury pays to borrow money in financial markets, slipped from 4.84pc to as low as 4.77pc in early trading.
This coincided with a sharp drop in oil prices as Donald Trump claimed the Strait of Hormuz would reopen by the end of next week.
The US and Iran are expected to sign a memorandum of understanding in Switzerland on Friday.
Brent crude was down more than 4pc to $83 a barrel on Monday, its lowest level since March.
Lower crude prices ease inflationary pressures on the economy, which means there is less impetus for the Bank of England to raise rates.
This also feeds into lower borrowing costs for the Government on its £3 trillion debt pile.
Stephen Innes of SPI Asset Management said: “Oil down takes the inflation impulse down.”
Traders have now reduced bets on the Bank raising rates, with money markets only pricing in one rate rise this year from 3.75pc to 4pc, which could come as late as December.
The yield on two-year gilts, the UK bonds which are more sensitive to interest rates, dropped from 4.23pc to as low as 4.15pc on Monday.
Laura Lambie, senior investment director at FTSE 250 asset manager Rathbones, said the prospect of peace has made interest rate cuts more likely in the long-term.
“I do think that cuts are more likely over time and we may well, if we’re lucky, see a rate cut by the end of the year because that hinges on the expectations for inflation and obviously the rise in oil price have really pushed up inflation expectations,” she told BBC Radio 4’s Today programme.
“So any de-escalation of that is going to be good news for inflation.”