UK Gilt Yields Surge as Concerns Grow for UK Economy

Market focus in the UK continues to be underpinned by moves in the gilt market as participants consider the possibility of more persistent inflation, dampened growth, higher levels of government borrowing and a higher natural rate of interest.

Yields on UK gilts continued to appreciate yesterday with the 10-year hitting its highest levels since that seen during the wake of the 2008 GFC. The move was even more pronounced for yields on longer term gilts, particularly that of the 30 year which rose to its highest level this side of the millennium, exceeding 5.44%. This came as yields on the 30-year rose over 20bps during yesterday’s session – meaning that they are now 100bps higher than a year ago and 60bps higher than a month ago. Meanwhile, yields on the 10-year rose over 10bps over yesterday’s session up 100bps on the year and 50bps up on the month.

Elsewhere, yields on the 2-year (which are more sensitive to short term interest rate expectations) rose over 5bps over yesterday’s session to 4.5% – meaning that they are now 26bps up on the month. This comes as market participants downwardly revise their rate cut expectations from the Bank of England.

For example, while money markets were implying that there were three 0.25 percentage point cuts over 2025 priced in a month ago, there are now just two such cuts priced in.

The trend in the bond market reflects growing concern that the UK economy will continue to face headwinds around inflation and growth, with the Bank of England likely needing to maintain restrictive monetary conditions. Indeed, the latest figures form the ONS indicate that the UK economy grew 0% over Q3 having been downwardly revised from 0.1%.

Such a pronounced move in the bond market yesterday forced the chancellor Rachel Reeves to issue a statement, marking the second such intervention in as many days.

This comes as eyebrows are being raised over whether Reeves will be able to meet her fiscal responsibility rules given the surge in borrowing costs. During the Autumn Statement, Reeves signalled that the budget had left No.11 with £9.9bn worth of fiscal headroom, however the rise in borrowing costs could thus narrow this headroom, leaving the government with a fiscal pain-in-the-neck.

A Treasury spokesperson reiterated Reeves’ attempt to ease concerns. Here, they stated that “No one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.” Analysts are now weighing up whether the government may have to raise taxes or cut public spending further to ease borrowing costs in order to keep within their fiscal rules. This of course follows the budget on 30 October where Reeves announced some £40bn worth of tax increases alongside a £22.6bn increase in day-to-day spending a move which will likely raise the tax burden from 36% to 38% – its highest level in modern day peacetime Britain.

With concerns growing over the UK’s fiscal position, analysts are hotly anticipating the OBR’s updated economic forecast, with the expectation that Reeves will respond to the House of Commons on 26 March.

Yields on the UK 10-year now trade 16bps higher than the US, 229bps higher than Germany and 151bps higher than Greece.