Gilts yields rising: the risk of unanchoring

UK Gilts yields are rising and risk becoming unanchored.

Rate cut, curve steepening
The Bank of England’s August rate cut to 4% has lowered borrowing costs at the short end of the curve. Short-dated gilt yields fell in line with expectations. But at the long end, yields have moved higher. This steepening reflects market concerns around the sustainability of the UK’s £2.7 trillion debt load and the supply pressure from quantitative tightening.

Long gilts are now trading at yields above 5%, levels that until recently were considered unthinkable. The fact that 30-year yields have climbed beyond their 2022 “mini-budget” highs is an early warning that debt dynamics, not just inflation expectations, are starting to weigh on investors’ confidence.

Supply, not demand
At the heart of the move is supply. Quantitative Tightening is the reverse of Quantitative Easing so the Bank of England is selling, not buying Gilts from its balance sheet to tighten monetary conditions. The government is issuing more debt while the Bank of England is simultaneously reducing its gilts holdings via QT. This double-supply effect pushes gilt prices lower and yields higher. Markets are effectively demanding a higher risk premium to hold UK debt.
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This matters for advisers and clients because it shows that the long end of the curve is vulnerable to shifts in sentiment. If yields continue to drift higher, borrowing costs across the economy could rise in spite of the Bank’s easing. For now, we believe the short end remains the safer place to allocate, where central bank policy exerts more direct influence and yields are more stable and both inflation risk and duration risk have less impact.