From Morningstar: 2025-01-09 06:33:35

The UK government bond market is in turmoil as long-term gilt yields spike to levels not seen since 1998. 30-year gilt yield is at 5.40% and the 10-year is at 4.84%. The pound has also dropped against the dollar, currently at USD 1.23.

Factors causing the spike include concerns about UK government tax and spending plans outlined in the Oct. 30 Budget. Proposed National Insurance employer contribution increase has led to price rises, sparking inflation worries. Financial markets were expecting UK interest rate cuts in 2025, but forecasts are uncertain.

Bond yields move opposite to prices, and recent UK government bond sales have pushed yields up. Interest rate increases and inflation expectations also impact gilt yields. UK interest rates have risen from 0.1% to 4.75%, affecting gilt yields.

Gilt yields have risen post-Budget, signaling concern about government fiscal plans. Market turmoil reflects anxiety over inflation, borrowing, and fiscal policy. The FTSE 250 is down 0.45% due to bond market anxiety. The pound has fallen against the dollar, impacting exports and imports.

Investors are selling UK debt due to concerns over the government’s fiscal approach. The cost of borrowing has risen, challenging spending pledges. Global bond markets are also tracking US and German yields higher. Market focus may shift with Trump’s presidency and potential inflationary policies.

The spike in gilt yields is concerning for bond investors, as it reflects anxiety over inflation, borrowing, and fiscal policy. Shorter-term yields have seen more modest increases, around 4.53%. Bond market volatility could impact equity markets, as seen with the FTSE 250’s 0.45% drop. Retail gilt investors may not be enticed by a 30-year government debt with a yield above 5%. Higher gilt yields offer higher income, but also reflect higher risk. The UK and US are less likely to default on their debts compared to countries like Greece, with the UK currently rated AA by Morningstar DBRS.

Investing in 30-year bonds may not appeal to all investors due to the long wait for returns. Pension funds often favor longer-term debt to match long-term obligations. Fidelity’s Riddell sees unease in long-term government spending and deficit policies driving up yields for longer-dated government bonds, not necessarily due to inflation concerns.



Read more at Morningstar: UK Government Bond Turmoil: What it Means