In recent weeks, the UK government has enjoyed a significant reprieve in long-term borrowing costs as the bond market stabilizes. As of earlier this week, yields on long-term, 30-year government bonds–or gilts as they are known in the UK–were at their highest levels since 1998. This conflated increase spurred concern about the sustainability of UK government finances, drawing the eye of market analysts.
Until then, the yield on 30-year gilts was on a multi-month upward trend. It has recently dropped to 5.55%, from a peak of 5.75% Wednesday. This swift drop marks a historic shift in the dynamics of the bond market. It suggests that future UK borrowing costs will come under less pressure.
Speaking to the Treasury Committee, Bank of England Governor Andrew Bailey said on Friday that the surge in bond yields means “something.” He described the 30-year yield as “quite a high number” but emphasized that it is “not what is being used for funding at all at the moment.” Bailey’s comments offer a fascinating glimpse behind the curtain into the bond market today, particularly what is causing so much movement in bond yields.
The recent increase in UK government bond yields is down to a number of factors. Geopolitical tensions, particularly the war in Ukraine, and high levels of government borrowing are two of the biggest factors. The trade policies of US President Donald Trump have contributed to tilting the landscape of UK bond yields. The US bond market is starting to crack under the pressure. Rising yields are driven by fears over high debt levels and the effect of Trump’s new tariffs on inflation. Increased fears of the independence of the Federal Reserve are adding to this pressure. Consequently, US 30‐year Treasury bond yields have shot up to their highest levels in more than a month.
Bailey remarked on the growing uncertainty regarding future economic conditions, stating that “there is now considerably more doubt about exactly when and how quickly” the situation may improve. That worry is part of a bigger picture of unease across financial markets about the persistent hardships afflicting both the UK and US economies.
Nevertheless, the bond market seems to be stabilizing. Market participants continue to watch new issuances of government borrowing and global economic indicators. The recent calming in long-term borrowing costs will be welcome relief to the UK government but many clouds of uncertainty still loom large.