UK gilt yields have been making headlines recently, sparking questions about what’s driving the surge in borrowing costs and whether investors should be concerned. With global bond markets in flux and domestic pressures in play, we explore the key factors at work and what they mean for the UK’s economic outlook.
Gilt yields have not risen in isolation. The sharp increase in global bond yields, led by the US since September 2024, has set the stage. This shift is rooted in a resilient US economy and persistently high inflation, which has delayed market expectations of Federal Reserve rate cuts. Adding to this, under President Donald Trump’s administration, fiscal spending remains robust, keeping US borrowing levels elevated.
These global dynamics inevitably influence UK gilt yields, given the country’s reliance on foreign investors for financing. The correlation between UK 10-year bond yields and US counterparts highlights this interplay, with rising global borrowing costs driving up UK borrowing costs in tandem.
Domestically, recent policy decisions have compounded the issue. Following the October Budget, an increase in the UK’s spending commitments has led to expectations of higher government borrowing. This anticipated influx of new gilt issuance has weighed on bond prices. Additionally, persistently high core inflation in the UK limits the Bank of England’s ability to cut rates, further affecting gilt performance.
However, this situation is markedly different from the turbulence of 2022, when the Truss administration’s mini-Budget caused a sharp rise in gilt yields and spooked markets. Back then, the spread between UK and US 10-year yields soared to 0.50 percentage points, reflecting significant investor wariness. Today, that spread stands at a more modest 0.15 percentage points, underscoring greater market confidence in UK debt.
The primary concern lies in how rising borrowing costs could constrain fiscal policy under Chancellor Rachel Reeves’ self-imposed fiscal rule. Lower-than-expected UK growth in late 2024, coupled with higher government borrowing costs, is likely to tighten Treasury spending. This may necessitate either cuts to expenditure or increases in taxation, both of which could weigh on economic growth.
For long-term investors, current gilt yield levels present opportunities. Despite short-term pressures, a weaker UK growth outlook could compel the Bank of England to reduce interest rates further, which would support gilt prices. At Arbuthnot Latham’s forthcoming Investment Committee series, we will delve deeper into these dynamics, assessing their implications for inflation, growth, and market prospects.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.
