3 September 2025
If you are covering the global bond markets, please see the following comment from 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.
