Why UK bond yields have spiked in 2025

What is causing the increase in bond yields? 

The first thing to acknowledge is gilt yields have not risen in a vacuum. Global bond yields have risen sharply since September 2024, led by US bond yields. This is on the back of a resilient US economy and stickier inflation than markets had anticipated 6-12 months ago. Market expectations of Fed rate cuts have been pushed out on this firm growth and inflation backdrop.
 
In addition, there is an expectation that under his new administration, Donald Trump will be keeping the pedal firmly to the metal with fiscal spending keeping US borrowing levels elevated.
 
UK gilt yields are sensitive to rising global yields, as much of the UK financing comes from foreign investors. So, when global borrowing costs increase, UK borrowing costs are likely to increase. In the chart below you can see how correlated UK 10-year bond yields have been with US 10-year bond yields.
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This is not to say that local factors have not been pertinent. The step-up in the UK’s spending commitments following the October Budget means that we’re anticipating an influx of new government borrowing in the near term. This increased supply in UK gilts will be a headwind for bond prices.
 
Furthermore, UK core inflation remains elevated, curtailing the extent to which the Bank of England can cut rates. This has also been a significant factor in UK gilt performance.
  

Are these moves a cause for concern? 

At this stage, we don’t think so. The situation is different from the turmoil in 2022, when we saw UK gilt yields rise largely on the back of Truss’ ill-fated mini-Budget. This is highlighted by the spread between the UK 10-year yield and US 10-year yield, which surged to 0.50 percentage points in 2022, reflecting heightened wariness of UK debt.
 
The current spread between UK debt and US debt is around 0.15 percentage points. Markets currently have more confidence in UK debt than during the Truss Budget.
 
The more significant impact for us will be how the increased cost of government borrowing impacts Chancellor Rachel Reeves’ self-imposed fiscal rule. The latest gilt moves and lower UK growth in the second half of 2024 likely means further tightening of the Treasury’s purse strings either through lower spending or higher taxes. This will likely negatively impact UK growth.
 
From a market’s perspective, while we do believe that there may be some further domestic pressures on the bond market in the short-term, current yield levels are attractive from a long-term perspective. The weaker UK growth backdrop will put pressure on the Bank of England to continue cutting rates. If they were to do this, it will be supportive for gilt prices.
 
We anticipate discussing this opportunity, in the context of inflation and growth expectations, at our upcoming Investment Committee series.
 
If you have questions about bonds or anything else related to what is going in the markets, please get in touch with your investment manager or private banker.