With UK long gilt yields rising, and concerns over the wiggle room for the Chancellor Rachel Reeves per her own fiscal rules, there are fears that UK debt will follow US debt and be downgraded.
Commenting on market movements, Susannah Streeter, Head of Money and Markets, Hargreaves Lansdown, said: “Gilt yields on longer-dated UK bonds have been climbing this year. This owes an enormous amount to movements in the US, thanks to nervousness over President Trump’s plans to cut taxes and spend more – plus Moody’s downgrading of the country’s credit rating. Bonds over the pond set the direction of prices, and as ever, UK bonds follow in its wake.”
“The rise in gilt yields in the UK make borrowing more expensive for the government, which potentially mean the government will break its self-imposed fiscal rules. It’s one reason why there has been more talk of tax rises and spending cuts. The IMF has suggested the fiscal reporting rules as they stand might be doing more harm than good because of the speculation and uncertainty they’re spreading.”
The Chancellor’s Spending Review is set to be published next week, which the Institute for Fiscal Studies notes “is the first to happen outside of a pandemic since 2015” and includes plans for four years of investment spending alongside confirming allocations to UK government departments.
Meantime, the rising yields pose a challenge to bond investors, adds Victoria Hasler, Head of Fund Research, Hargreaves Lansdown: “Rising gilt yields are not usually good news for bond investors, particularly those holding longer duration bonds. Even a small rise in the yield of a 30-year bond can result in a big loss of capital for investors.”
“Since the start of the year, the yield on the 30-year gilt has risen by 32 bp (or 0.32%). This is equivalent to a fall in the price of the bond of around 4%. Perhaps not too dramatic compared to what has been going on in equity markets, but enough when most people hold bonds as ballast in their portfolios.
“Rising interest rates have been pushing bond yields higher for the last few years, but the increased economic uncertainty resulting from President Trump’s tariffs, combined with inflation which is proving sticky, have meant that investors now expect interest rates to fall slower and less than originally predicted. This, in turn, has led to long term bond yields rising.
“While this isn’t good news for anyone who already owns these bonds, it does mean that for investors wishing to buy them they can now get in at a cheaper price. Be careful though – long-dated bonds can be quite volatile and few retail investors will want to hold them until they mature so the yields you see won’t necessarily be equivalent to the returns you get. If you do want to hold for 30 years though (for example in a pension) then yields are starting to look quite attractive.”
