When UK government bond yields make the front pages, advisers know it’s time to sit up and take notice. Yesterday, the gilt market sent shockwaves through the financial press as borrowing costs hit a 27-year high, sparking fresh questions about fiscal stability, market confidence, and what it all means for clients. While the headlines may suggest panic, the reality is more complex, with structural shifts in the market, global influences, and record-breaking bond issuance all playing a part. In this article, experts explain what advisers need to know about the latest gilt market wobbles—and why the story is far from straightforward.
Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, part of Raymond James Wealth Management, comments: “The UK has seen longer dated bonds sell-off a little more than other developed market countries because we’ve seen a large drop in the longer dated bond buyer base. Historically, defined benefit pension funds were a massive buyer of long end gilts, but as we have seen a shift to defined contribution schemes, demand has dropped. This is a technical issue that has exacerbated concerns around UK inflation and interest rates, combined with global issues. Some of this sell-off therefore could be quelled if we see a reduction in bond selling at the long end (quantitative tightening) by the Bank of England, and a shift of debt issuance from the long end to the short end by the DMO/UK Treasury. In addition, any hint of cutting spending, tax increases and continued commitment to the fiscal rules at the Budget, will also see some of this sell-off reverse.
As it stands, the market is in wait and see mode. Buyers of longer end gilts are price sensitive (not Central Banks or liability matching DB pension funds), and yields could continue to drift higher before we see a resolution.”
Also sharing her reaction, Emma Moriarty, Portfolio Manager, CG Asset Management, commented:
“Gilt yields are an expression of bond markets’ confidence in the UK government. This confidence is always a function of the sustainability of fiscal policy and the outlook for growth in the UK economy. Of course, international factors – the weakened global growth outlook caused by US trade policy – are a contributor. But the reality is that the government came out of the last budget round with wafer thin fiscal headroom. The very public U-turn on proposed cuts to welfare spending showed that, despite the deteriorating fiscal situation, there is still no effective majority for cutting expenditure. Since then, all proposals to shore up the fiscal position have been centred on raising taxes in a way which won’t hit “working people.” There is a real fear that these proposals – for example, a wealth tax – disincentivise economic activity for uncertain impact on revenues.
International factors have definitely contributed. Gilts have to compete in the market of other developed market government bonds, and when all of the UK’s closest competitors – the US and Europe – are also facing intractable fiscal issues, market participants fear increasing supply in an environment where the traditional price insensitive buyers (central bank QE, pension funds) may not be able to respond to the same extent. Ultimately, price will be the adjustment mechanism.
One striking feature of the Debt Management Office’s more recent announcements is the shift away from issuing long-dated gilts. The DMO is mandated to issue debt in a way which minimises financing costs, and more recently their issuance has shifted away from longer-dated gilts and towards shorter maturities. While this makes sense from a more immediate cost perspective, and will at least in part reflect the disappearance of traditional price insensitive buyers, it is also a very concrete and public acknowledgement of bond markets’ deteriorating confidence in the outlook for the UK.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“Government bond yields have jumped sharply in recent days, largely because investors are demanding a higher return to lend to countries with heavy borrowing needs. The UK has not been immune. While much of the attention has been on the 30-year yield hitting multi-decade highs, governments typically borrow across the maturity spectrum and the rise in shorter to medium-dated has been less pronounced. But higher borrowing costs for the state mean it becomes more expensive to finance existing debt and harder to fund new spending.
For the public, that translates into tougher fiscal choices for the government, with less room to ease the tax burden or boost investment. This only adds to the headache facing Rachel Reeves as she prepares her second budget, with markets making clear that borrowing to fill the black hole in the public finances will be difficult and may ultimately point to further tax rises. There are some silver linings: savers may benefit from better yields on fixed income investments, while retirees shopping for an annuity will find the income they can secure today is far higher than just a few years ago.
But the broader picture is one of tight fiscal constraints, rising borrowing costs and the risk that without stronger growth the government ends up trapped in a cycle that is hard to escape. Rachel Reeves has committed herself to her fiscal rules, and while these have been loosened once already, there is likely little appetite for further easing just so she can claim to have met targets. Tax rises are bad for growth, and with little room for additional borrowing, it leaves spending cuts as one of the only future viable options. With a Labour government already cowed by its own backbenchers, those cuts are unlikely to materialise unless the market forces it to change tack. There is likely some more volatility to come in bond yields as a result.
Although, there is plenty of doom and gloom around UK government bonds at present, but there are also reasons that fears may be overblown. Worries about a 1970s style IMF-crisis certainly seem exaggerated with credit derivative markets showing little concern about a potential debt default. Rating agency Fitch also recently reaffirmed the UK’s AA- credit rating. Meanwhile, the BoE is seen as likely to reduce the pace of its Quantitative Tightening from £100bn to £75bn, which could be announced as soon as its next policy meeting in September. While inflation is rising it is expected to fall towards the end of the year, raising the chances of Bank of England rate cuts and lower yields. That could also just help spark some sort of economic growth – the elusive elixir for these troubles.
The UK is also not alone in facing fiscal challenges, and at least part of the increase in gilt yields can be attributed to events across the Atlantic. US President Donald Trump has brought a number of big policy changes in this regard, such as the implementation of far higher trade tariffs on imports and the passing of the so-called “Big, Beautiful Bill” which is expected to increase the US deficit by US$3.4tn through 2034, according to the Congressional Budget Office. Trump’s repeated and brazen attacks on the Federal Reserve’s independence have also played a role. The relationship between US and UK bonds can be seen by looking at the change in the respective 10-year yields from the start of 2025 through 25 August. The US 10-year yield has fallen by 32 basis points (0.32%) during this time while the UK 10-year yield is up 13 basis points (0.13%), meaning a spread widening of 45 basis points (0.45%).
There are also government debt cost concerns elsewhere, with French and Japanese bond yields making headlines for the wrong reasons in recent weeks. In Japan, the sharp rise has caused concern after a prolonged period of near-zero interest rates and a persistent lack of inflation.”
Fred Repton, senior portfolio manager on the global fixed income team at Neuberger is looking ahead to the budget as he says:
“It’s important to put the rise in yields in context. Yesterday was the first day ‘back to school’ for global investors as Labour Day in the US ends the summer holiday season. There was a notable pick-up in new issuance in bond markets that may have surprised bond market participants slightly. In fact, yesterday was the largest issuance day on record in Europe as a whole. For the UK, the Gilt syndication yesterday and the linker tomorrow represent the largest UK sovereign issuance on record. As such, especially with expectations of lower rates having ramped up following Jackson Hole, the issuance has caused turbulence in the bond markets. However, one should not draw too many conclusions from one extremely active day for issuance. What can be said though is that market participants are again focused on deficits and political risk and this theme is likely to continue far into the year as the UK budget is now set to be on November 26, a long time from now. “
Sharing his reaction, Matthew Amis, Investment Director, Rates Management, at Aberdeen, says:
“Although it makes great headlines, the move in gilt yields in the last few days has largely been in line with other markets. Global bond yields are moving higher and the UK is going along for the ride.
The real story for the UK should be that the UK DMO has just managed to syndicate £14 billion of 10 year gilts, a record size. Not something that could be delivered in a Truss-like meltdown.
Gilt markets are on high alert for the Autumn budget, and constant speculation on tax proposals is far from helpful, but for the time being the UK is not the outlier in global bond markets.”
Taking a somewhat different angle, David Roberts, Head of Fixed Income at Nedgroup Investments, said:
“So, nobody wants to buy bonds? That’s what some headlines might suggest.
But yesterday told a very different story, as the UK saw its largest-ever gilt issuance with £14bn issued, met with record-breaking demand of £150bn.
In the US, corporate bond issuance hit a record of around $46bn and, across Europe, sovereign and corporate debt supply exceeded €40bn, another milestone.
Now, you can interpret this in two ways. Firstly, there’s a surge in supply, which can pressure prices. Secondly, and more importantly, there’s extraordinary demand – investors are actively seeking yield in a high-rate environment.
Gilt prices fell a little again today. Bash the UK as much as you like, the fall was largely in reaction to yet more upbeat economic numbers. This time in the shape of revised PMI figures, showing the UK growing at a healthy rate”
What you definitely can’t say is that there’s a buyers’ strike. The numbers speak for themselves.”
