UK government bond markets are making the headlines again as gilt yields on longer-term debt spike.
The 30-year gilt yield is now at levels last seen since the late 1990s and the 10-year gilt is trading at its highest level since 2008. For both these maturities, the yield is up by around 1 percentage point, or 100 basis points, in a year—a massive move in the bond markets. Over a month these maturities have jumped by around 0.5 percentage points.
As of Friday, the UK 30-year gilt yield is currently 5.38% and the 10-year is 4.82%, stabilizing after a week of turmoil.
The pound has also fallen against the dollar and currently buys USD 1.23.
UK Gilts Turmoil: Why Is This Happening?
A number of factors are involved in this story: Bond markets are concerned about the UK government’s tax and spending plans as outlined in the Oct. 30 budget.
Some tax changes are yet to kick in. Chief among them is a planned increase to National Insurance employer contributions, which many businesses have said is a cause for concern. It has already resulted in price rises as firms pass on the costs of the hike to shoppers. The national living wage also increases in April 2025.
As such, there is heightened worry about the potential return of inflation, a trend also seen in the US and eurozone.
The incoming Trump administration is also a factor for global bond markets, with tariffs, protectionism, and budget deficits all expected.
We explain why this matters to investors and how this works in practice.
Why Do Government Bond Yields Go Up?
Bond yields and prices move in different directions. The sale of bonds, and specifically UK government bonds, or gilts, has pushed yields up recently.
Other factors that can support bond yields include interest rates and inflation/interest-rate expectations.
Having raised interest rates from 0.1% to 5.25% in less than two years, the Bank of England cut rates just twice in 2024. This has kept government bond yields higher than expected.
Financial markets were pricing in three or two UK interest-rate cuts in 2025 at the end of last year, but that has been cut to just one, although there are divergences of opinion on the accuracy of these forecasts. Some experts still expect four cuts, which, if they materialize, should reduce short-term government bond yields.
Why Are Investors Selling UK Debt?
Given that the budget was more than two months ago, the market turmoil would seem a delayed reaction to the new government’s fiscal plans. When Labour came to power it claimed to have found a “fiscal black hole” of £20 billion and rewrote the borrowing rules to allow higher spending and taxation. When the government trailed the new rules in the press ahead of the Oct. 30 budget, gilt yields rose, a sign of worry. The events of the last 48 hours would appear to be a further note of concern about the government’s approach.
For the chancellor, Rachel Reeves, the market moves mean the cost of government borrowing has just shot up at the very point she has to make good on spending pledges made in the election. Governments worldwide use bonds to fund public spending on short- and long-term commitments, from funding the NHS to infrastructure projects like HS2.
Is This a Liz Truss-Style Crisis?
Gilt yields are now higher than during the ill-fated Liz Truss and Kwasi Kwarteng mini-budget era. Though there is little sense of the market panic seen in 2022, this is an unwelcome start to 2025 for the Labour government, which is on the back foot over domestic policy and accusations that Elon Musk is “interfering” in UK politics.
Mike Riddell, portfolio manager at Fidelity International, explains that this is not a local story. It is a global one. UK bond yields are tracking US yields higher. German bond yields have also ticked up.
AJ Bell’s head of investment analysis Laith Khalaf doesn’t buy the argument that it’s a post-budget backlash, arguing instead that Donald Trump’s imminent arrival in the White House is more pertinent.
“The fact yields are rising on both sides of the Atlantic does suggest the new year has brought with it a focus on the incoming US president, and the potential for his trade and immigration policies to be inflationary, which has implications for both economies,” he says.
Kathleen Brooks, research director at XTB, says that this could be potentially more serious for the UK, even though the country has a lower deficit than the US and France.
“The UK is looking like an outlier and is in the sights of the bond vigilantes,” she says. “It feels like the UK is in a tricky spot, and with UK [inflation data] set to be released next week, the focus on the UK bond market could continue for some time.
“Other countries have their fiscal issues, but the UK is potentially on the cusp of another fiscal crisis, without either 1) intervention from the BOE, or 2) government action to either raise tax or cut spending. Neither of these are attractive options when the economy is stagnating.”
Will the UK Chancellor Have to Change Her Fiscal Plans?
Some commentators think that Reeves has been backed into a corner by the bond market moves in January. Oliver Faizallah, head of fixed-income research at Charles Stanley, flags up potential changes to the government’s spending plans—and more worryingly for consumers still reeling from the cost-of-living crisis, potential tax rises.
“Higher gilt yields have increased borrowing costs, which has eroded most if not all the UK government’s fiscal headroom. With poor growth numbers the Labour government may be forced to reduce spending, increase taxes, or increase borrowing,” he says.
“We are potentially looking at a stagflationary environment (higher inflation and poor growth) or a recessionary environment (growth falling to such an extent that inflation drops as well) in the UK.”
Will There Be a Market Intervention?
Recall that in the last gilts crisis in 2022, the Bank of England intervened to calm the market over concerns over pension fund liabilities. Investors learned a new acronym at the time, LDI, or liability driven investing. There’s no indication that the Bank is planning an intervention this time.
It’s worth noting that under the quantitative easing program that followed the financial crisis, the Bank of England became an owner of billions of pounds worth of the UK government debt. This process is being unwound.
The Treasury has not commented on whether it plans to make a market move.
Still, with past market crises, a move by the government or central bank can be helpful.
What Are the Other Market Implications?
The pound has fallen to its lowest level since 2023: In September, a pound bought you USD 1.33, now that has fallen to USD 1.23. Against the euro, the pound is at EUR 1.19, which is still higher than a year ago. As well as having implications for tourists, a weaker pound affects exports and imports.
Stock and bond markets are not usually correlated, and bonds are designed to limit equity market volatility. But the bond market anxiety could still feed through into UK equity markets as it reflects anxiety over inflation, government borrowing, and fiscal policy.
The FTSE 250, whose constituent stocks derive far more of their revenue from domestic UK business activity than the blue-chip FTSE 100, has fallen around 3.5% in the first full trading week of January.
The move in gilt yields will also have a knock-on effect on fixed-rate mortgages this year.
I’m a Bond Investor. Surely This Is Good News?
At the shorter end of the yield curve, increases in the gilt yield have been more modest, so the two-year gilt is yielding 4.50%—not dissimilar to rates available to cash investors. It’s not exactly a bonanza for retail gilt investors, who usually don’t own 30-year government debt, for the reasons explained below. A yield above 5% is unlikely to tempt a retail investor to buy a 30-year gilt for the yield alone.
Higher gilt yields mean investors get a higher yield for investing in this lower-risk asset class. But as investors saw in the eurozone debt crisis, higher yields reflect the higher risk that owning the debt involves. So it means higher income but also is a negative indicator.
Unlike Greece, the UK and US governments are unlikely to default on their debts, a key risk bond investors must consider. The credit rating of sovereign states is a factor here: AAA rated countries like Norway and Australia are considered the lowest risk, while the UK is just below this: as of November 2024, Morningstar DBRS rates the UK as AA “with a stable trend.”
Isn’t 30 Years a Long Time to Invest in Bonds?
One factor of bond investing is the expected return of your capital if you hold the bond “to maturity.” In the case of a 30-year bond, this is a long wait for some investors. Longer-term debt is often more popular with pension funds, however, which have to match long-term obligations with predictable cash flows.
For Fidelity’s Riddell, the moves at the longer-term end of the yield curve are part of a wider unease at long-term government spending and deficit policies.
“These moves are indicative of fixed-income investors becoming increasingly concerned about fiscal largesse, and all the government bond supply that accompanies it,” he says.
“It’s not about inflation concerns, where the market’s medium-term inflation expectations are little changed since the beginning of November.
“Investors are instead demanding a higher risk premia or ‘term premia’ to compensate them for owning longer-dated government bonds.”
More on UK Government Bonds
After the Rate Cut, Should I Still Buy Bonds for Income?
How Top Bond Managers Are Playing the Rate Cut
Buying Government Bonds? Read This First
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
Correction: Corrects spelling of Liz Truss in fourth sub-headline.
