What’s happening with Gilts yields?

Although the Bank of England cut rates, long-dated Gilts yields are rising (so their values are falling).

By Henry Cobbe CFA, Head of Research, Elston Consulting

Why Gilts yields matter, UK gilt yields explained

​Gilts yields are the returns available to investors by buying Government debt (lending money to the Government) over a given time frame.  Put differently, they relate to the interest the Government needs to pay to issue new debt to fund its spending plans.

Pizza, interest and yield

​When you cut a pizza into a higher number of slices, each slice is smaller.  Similarly, when you divide a bond’s future maturity value by a higher yield over time, the bond’s value today is smaller.  This is why bond values move in the opposite direction to yields, and rising Gilts yields means falling Gilts value.

The importance of term

The plot of yields over time is called the yield curve and is normally upward sloping.  This is because normally if you lend money to someone for 30 years, you expect a higher interest rate, than if you lend to them for 10 years, and much higher than if you lend to them overnight for just one day.  The Gilts market is no different.  In normal times, the Bank of England Bank Rate influences the Sterling Overnight Interest Average, the 10 year Gilts yield reflects a 10 year term premium above SONIA, and the 30 year Gilt reflects a 30 year term premium above SONIA.  That’s in theory, but in practice sometimes longer term yields can be below short-term yields (at those times the yield curve is “inverted,” signalling fears of a recession.

The UK yield curve

Changes in the UK yield curve reflect changes both in the level of interest rates, and any changes in term premium.  The UK yield curve as at end August 2025, May 2025 and August 2024 is shown below.

What's been happening to yields

To fight inflation, the Bank of England has been raising interest rates since 2022.  This means that short-term (overnight) interest rates, known as SONIA (“Sterling Overnight Index Average,” which is aligned to the Bank of England Bank Rate), has also increased.  Good news for Deposit holders and holders of Money Market Funds.  The Bank Rate peaked at 5.25% in July 2024 and rate cuts since then means that the Bank Rate is now 4.00%, so SONIA rates have also declined.  The SONIA rate is green in the chart below.  Because SONIA started rising, and longer dated Gilts normally have a term premium, the yield on 10 year gilts (in blue) and 30 year gilts (in red) has also been rising.  The rising SONIA tide has lifted all Gilts boats, so to speak.  Whilst that’s not a concern in itself, it has meant that the cost to the Government of servicing its debt has increased dramatically, and famously, the Government now pays more in Gilts annual interest payments than it does for its annual budget on Defence.  This week 30 year yields nudging above 5.66% - the highest level since 1998.

​The chart below shows exactly the same data but focuses only on the term premia of 10 and 30 Year Gilts over SONIA, for clarity.

What this chart shows that looking at term premium only, whilst it has increased, it has not reached the levels of the Truss-Kwarteng mini-budget driven Gilts crisis of September 2022.  The widening of term premium (a sign of decreasing confidence in and appetite for long-term debt.

Rapid pace

As the chart shows, the term premia increased most dramatically with the Truss-Kwarteng budget of September 2022.  But following the election and Reeve’s first budget in October 2024 term premia have been steadily increasing and then started to move more rapidly over this summer as concerns grow that Reeves will struggle to balance taxing, borrowing and spending plans given the lack of economic growth.

Not just a UK problem, but that doesn't help

The pressure on long-term government bonds, is not isolated to the UK.  30 year US Treasuries are also under pressure given the level of US Government indebtedness.  But unlike the UK, the US has the advantage of being the world’s reserve currency, the world’s largest trading partner and the most liquid treasury market.  By contrast, other than the declining assets in defined benefit pension funds (who have enough Gilts already), nobody “needs” to own UK Government debt: so who is the buyer of the debt the UK Treasury must issue?  Central Bank rates, Government bond yields, and currencies are all interlinked, so a problem in the Gilts market could trigger weakness in Sterling.

Why is this such big news

Rising gilts yields have become big news recently for three reasons
The level of gilts yield is at 30 year high in absolute terms
The widening of term premium shows reduced appetite and confidence in UK debt
The rapid pace of that widening could puts pressure on both the Chancellor and the Treasury to avoid any further deterioration in UK finances

All eyes on the Budget

Since the pandemic, there have been growing concerns around UK debt affordability.  Just as everyone needs to think about whether or not they can afford to borrow more against their house to build on an extension, the Government needs to think whether it can afford to borrow more against the economy to deliver on its spending plans.  That’s why there is a delicate balance between government taxing, spending and borrowing against the economy.  It’s easier for the Government to borrow money if the economy is growing.  If the economy is stagnating or even shrinking, that makes things a lot harder.  The gap between what the Government would like to borrow and the maximum amount it could borrow is called “fiscal headroom.”  And the combination of weak growth, rising debt costs, and unreformed spending plans, means that headroom is very narrow.  The delay of the Budget to late November (rather than late October) shows the Chancellor is giving herself a bit more time to plot a path forward.

What does this mean for investors?

Traditionally investors wanting a low-risk portfolio would have a relatively higher allocation to Bonds, compared to Equities.  However given the risk to Gilts, investors need to think carefully about the make up and average maturity of the Bonds in their portfolio.  Longer-dated UK Government Bonds are more vulnerable to changes in interest rate, inflation and affordability expectations than short-dated UK Government Bonds.  And in some cases Corporate Bonds and Emerging Market Government Bonds may seem “safer” for investors than traditional UK Government Bonds at the moment.  A robust investment process should take these changing considerations into account.

Are long-dated Gilts a buying opportunity?

​Buying gilts directly is more complex than it looks.  Bond maths is not straightforward.  So whilst yields are at their highest levels for 30 years, that does not mean they are necessarily attractive.  30 years is a long time a way, and bonds are very sensitive to changes in interest rate and inflation expectations.  From a cashflow perspective, investors receive the coupons until the final payment, not the yield.  And today’s real value of that final nominal payment depends on the uncertain path of inflation for the next 30 years.  So when it comes to Gilts, think pizza today, not pizza in thirty year’s time!