Solutions chart update: 30-year yields approach 30-year highs

Although uncomfortable comparisons may be made with 2022’s mini-budget given today’s high absolute levels of gilt yields, we believe there are two main key differences in the market environment. First, the rise in yields has been far more gradual to date than was seen three years ago.

Secondly, and just as importantly, the current moves in UK yields are predominantly reflective of global trends, as shown in the chart below. The key global themes that we have outlined previously remain: structurally lower demand for government debt, high supply, fiscal concerns, political instability and persistent inflation. 

Green shoots?

In the UK, focus is on the autumn budget, planned for 26 November. The government is likely to be keen to build investor confidence in the UK, and importantly, avoid a continued negative feedback loop of higher yields leading to less fiscal headroom and lower growth. 

On this note, we have seen positive and negative headlines. For example: Retail investors flock to gilts in record year, yet conversely Why are UK borrowing costs so high?. Amid these mixed messages, there are some green shoots to point to.

The three gilt auctions with the highest cover ratios[1]  have been in 2025, with all exceeding 4.4x cover. 2025 has also seen the largest syndications – the 10-year auction on 2 September raised a record £14 billion. 

So it seems that there is still demand for gilts. Furthermore, the UK has historically issued more longer-dated debt than the G7 average. This reduces the pass-through of higher borrowing costs. 

However, it’s still important to note that significant risk remains. The autumn budget will be a key event for the UK, while global events in countries such as the US and France will also have an impact.

What are the implications for investors?

We would begin by reiterating our previous comments and suggest not being overly caught up or influenced by short-term headlines.  That said, a healthy degree of caution seems sensible, and schemes should be prepared for sharp moves in yields, particularly as the budget approaches. 

In summary we believe schemes should: 

• Be aware of the potential impact of global yield moves and themes on the UK market
• Be cautious of the potential for yield spikes, especially around the time of the budget
• Ensure collateral headroom levels remain robust and arrangements are in place to top up collateral when required
• Consider today’s yields as a continued potential opportunity to chip away at long-term hedge ratio targets, assuming mark-to-market volatility can be withstood 

 

[1] The ratio of the total amount of bids to the amount on offer at a gilt auction or a Treasury bill tender. Also referred to as the Bid-to-cover ratio. (Source: Debt Management Office)