Gilt yields rise and fall based on several connected factors: the first is investor expectation around the future direction of inflation and interest rates; the second is the expected level of new bond issuance; and the third is the yield available on other government bonds, particularly US Treasuries.
So Rachel Reeves' inaugural Budget as chancellor came with much speculation around the implications of her plans on gilt yields, particularly as many client portfolios are still scarred from the impact of Kwasi Kwarteng’s "mini"-Budget in 2022, when fiscal largesse led to a rapid sell-off in gilts and investors worried that a huge increase in borrowing – funded by issuing more gilts – would lead to the supply of new gilts exceeding demand for those gilts. This pushed prices down.
As with all bonds, the gilt yield moves inversely to the gilt price. In anticipation of those future losses, investors, in the immediate aftermath of the Budget, began to sell their gilts, sending yields much higher, very quickly.
The immediate aftermath of Reeves' Budget solicited no such urgent response from markets; yields did rise materially the day after, but as part of a pattern of generally rising government bond yields around the world.
US government borrowing costs have also risen markedly in the past six months, rising almost 100 basis points to 4.3 per cent since September, according to sister publication the Financial Times.
Indeed, the US 10-year Treasury yield rose by 20 basis points the day after Reeves' Budget, as positive economic data in the US cast doubt on a thesis that dominated markets for much of 2024, that US and other central banks would rapidly cut interest rates.
This would have meant that the interest rate paid on bonds issued in future (known as the coupon) would be lower than on bonds issued at today’s interest rate, pushing the value of today’s already issued bonds up, and the yields fall.
Reeves' Budget contained plans to borrow £28bn extra, funded by issuing £28bn of new bonds.
That is the potential supply versus demand dynamic at work, with Jonathan Unwin, head of UK portfolio management at Mirabaud Wealth Management, saying: “Following months of leaks and speculation, markets seemed somewhat exhausted leading into today’s Budget, and the initial positive reaction perhaps reflected that the chancellor was taking a fiscally tighter approach than she could have done.
"However, as it becomes clearer that government borrowing would again have to rise (notwithstanding the numerous tax increases), reality is setting in that the Debt Management Office will need to issue more gilts than anticipated, with the Office of Budget Responsibility recognising a higher cash requirement of £30bn.
“As such, UK government bond yields have resumed their rise in recent weeks, and this is likely to continue until the Bank of England clarifies its outlook with respect to more rate cuts.”
Marc Devereux, head of investment consulting at Broadstone, says that while yields have been rising everywhere, “there is definitely a UK-specific impact going on. The 10-year yield is just off the 12-month high.
