UK gilt yields have been falling, giving the Chancellor some much-needed headroom
- The 10 year gilt yield has dropped from 4.74% to 4.41% within the past two weeks
- Inflation and wage data have contributed to the fall
- Yields may have been too high to start with
For some time, the pricing of UK gilts has either looked unfair, or the prefiguring of a likely fiscal crisis, depending on the pessimism of the analyst. Gilt yields were higher than other nations with far more pressing and intractable debt problems, and it seemed as if the UK was continuing to be punished for the ill-fated 2022 mini-budget. However, over the past week, the situation has abruptly changed.
The 10 year gilt yield has dropped from 4.74% to 4.41% in a matter of days. It makes Rachel Reeves’ sums a lot easier ahead of the November budget and may ease spending pressures. Debt interest has pushed UK government borrowing higher and higher in recent months, with borrowing over the first six months of the year reaching almost £100bn.
There have been a few encouraging pieces of economic data, which have helped pushed yields lower. Inflation for September came in lower than expected, which makes a resumption of rate cuts more plausible. Wage data also showed pressures easing, which should feed into lower inflation over the next few months.
Isabella Galliers-Pratt, investment director at Rathbones, says the composition of inflation data may have also given bond markets cause for cheer. There were declines in food, recreation, and culture: “(These were) sectors previously affected by the National Insurance contribution increase, suggesting inflationary fears linked to corporate cost pressures may be easing.” She believes the UK may be approaching, or past, the peak of this inflationary cycle.
Even with that in mind, the magnitude of the fall is surprising. Other global bond markets have fallen, but not to the same extent. The simplest explanation may be that gilt markets were mispriced to start with. David Roberts, head of fixed income at Nedgroup Investments, says the City is often the last to recognise domestic stability: “Inflation is likely to fall in coming months, gilt yields may well follow – indeed they have been for several weeks now – reducing interest payments and the 2026 benefit award round.
''''Sterling has been stable, gilts outperforming many international peers. If Reeves manages to stick to her plan to year end, it might just be the UK has turned the corner in international investors’ minds.”
It would be a welcome shift for the UK and a sign that it may finally be shaking off the ‘idiot premium’ that has kept borrowing costs higher since 2022. Chancellor Reeves will certainly need it in the months ahead.
