While day-to-day moves in government bond yields tend to be highly correlated across markets, yields on UK Gilts are currently higher than in any other developed economy. UK yields have drifted to their highest levels in decades over the past couple of years. The yield on the 10-year UK nominal Gilt benchmark has been oscillating between 4.5% and 5% for most of 2025, and has been consistently higher than the comparable yield on US Treasuries over the same period.
UK Gilts also stand out compared to other countries in terms of what has driven the increase in yields. We can decompose yields into secular drivers (market-perceived r-star and inflation trends) and transitory components (monetary policy expectations and term premiums). The term premium indicates how attractive long-duration government bonds are relative to investing in shorter-term money market instruments.
As we discussed in our previous Insights piece, term premium estimates are currently positive in all G10 markets except the UK. Our term premium estimate for UK Gilts has in fact decreased since the “mini-budget” episode in 2022, as shown in the chart below.
Our estimates of long-term inflation expectations, which we extract from inflation swaps and professional survey data, have been trending down since 2022, also offsetting part of the increase in yields driven by other factors.
The key driver of the increase in UK Gilt yields is r-star, shown in the chart above. It captures changes in the economy and markets that impact the yield curve equally across all maturities. The forces behind r-star tend to be secular in nature, such as a changing long-term growth outlook or concerns around fiscal sustainability. Long-term growth outlooks have not improved dramatically, so this is unlikely to have been a factor pushing up r-star. The increasing level of r-star indicates that investors are anticipating structurally higher yields on UK Gilts for other reasons.
The negative term premium indicates that duration risk is not compensated in the Gilt market, which suggests that short-term investors can find better opportunities for duration exposure elsewhere. This is very different from the UK mini-budget episode in September 2022, where the spike in yields was driven entirely by the term premium – indicating an attractive short-term opportunity.
What is different this time is that investors perceive the fiscal sustainability issues of UK government debt as a structural problem rather than a temporary issue caused by reckless policies that can be reversed, as they were back in 2022. As we referenced in a previous Insights piece, the first batch of bad fiscal news is perceived as temporary and initially shows up as an increase in term premiums. However, once investors learn that the fiscal sustainability issues and an increased supply of bonds will persist, yields move higher across the yield curve. This level shift cannot correspond to a term premium increase, but rather shows up as a long-term increase in yields across maturities through a higher level of r-star. This feeds through to policy rate expectations, where the Bank of England has to incorporate structurally higher yields by implicitly targeting a higher policy rate over the medium term. This mechanism leads to fiscal sustainability concerns being reflected across the curve, even in short-term yields.
Gilt yields are currently trading at levels that add to the difficulties of the fiscal situation. The consensus expectation for UK real output growth over the next year is slightly above 1% p.a., which combined with an r-star estimate of 3%, implies that the UK debt-to-GDP ratio is projected to grow at around 2% p.a. even with zero primary deficits. This is a very different world from the decade leading up to 2022, where the difference between real interest rates on government bonds and real output growth was consistently negative (i.e., ‘r minus g’ was below zero) – helping stabilise public debt. This benign environment has now reversed entirely.
Public debt in developed countries will need to be stabilised and reduced over time. The key question for long-term investors in government bonds is how this will happen. Our own work on this topic suggests that the most viable path is a form of “financial repression” where yields on government bonds will be brought to and kept at below-market levels through various policies. News outlets are frequently citing possible government initiatives such as requiring pension funds to invest in UK assets. This would suggest that entering at these high levels of yields is an attractive medium- to long-term opportunity. Navigating this environment is difficult, however, and requires advanced and timely tools for understanding developments in bond markets. We provide comprehensive decompositions of yields on government bonds across G10 markets as part of our Market-implied Macro offering.
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