September 2025
Market Commentary
Crunch time for the gilt market
(4 min read)
3rd September 2025
If you are unsure of any terminology in this article, check our Glossary for quick definitions.
In January of this year, we wrote an article about the precarious position of the UK government regarding the country’s deficit (January 2025 Article). The media headlines were challenging the sustainability of the UK’s debt mountain as the cost of government borrowing was rising sharply and GBP was weakening, reflecting that uncertainty.
At the time we gave the UK’s position the benefit of the doubt pointing out that the rise in yields was a global phenomenon, the cost of borrowing was rising across all industrialised economies, and GBP weakness was more about USD strength as all major currencies were weakening versus the USD.
We concluded that while there was absolutely no room for complacency on the part of policy makers it was disingenuous of the press to focus on the UK position in isolation.
The date of the Autumn budget has now been confirmed for 26th November 2025, and the Chancellor is again faced with a significant challenge in persuading financial markets that she can balance the books as the criticism of the UK fiscal stance we saw in January has returned once again to the headlines. The cost of long-dated government borrowing has increased well beyond the levels seen in January and at levels now not seen since 1998 — see chart below. Again, global markets are concerned about deficit levels all around the world, particularly in Europe, but in the UK’s case many of the reasons could be viewed as self-inflicted.
Chart 1
UK 30-Year Treasury Gilt Auction Bond Yield
Essentially, there are four drivers or headwinds at play here. Two are technical and two are fundamental.
Technical:
1. The Bank of England (BoE) is selling government gilts, reversing the policy adopted during the 2008 Global Financial Crisis (GFC) called Quantitative Easing (QE) when it was buying gilts from the market to inject money into the economy. ‘Printing money’ as critics described this process at the time.
2. For many years, final salary pension schemes have been buying long-dated gilts to immunise long-term liabilities and cashflows. As these schemes roll off and with the pension industry evolving from final salary to defined contribution, there is much less demand or need to buy long gilts. In other words, there is supply and demand imbalance for long government debt which increases the cost of borrowing. This is not unique to the UK. There is a time bomb in the waiting for long dated government bonds in Europe as pension schemes adjust, particularly in the Netherlands.
Fundamental:
3. Arguably, BoE has been too quick to reduce interest rates given its inflation mandate. With inflation just shy of 4% and base rates at the same level, real interest rates (after inflation) at effectively zero will not sit well with markets if inflation remains sticky and there is little evidence to suggest the BoE can be relaxed about the inflation outlook. In other words, there is potentially a major credibility problem which the long end of the market must price in.
4. Markets are also concerned about the appearance of no economic plan. In July of last year, the Prime Minister gave a very gloomy outlook, leaving the country to face a policy vacuum until the October budget, which as it turned out did not encourage economic growth. The government has repeated the same mistake this year creating uncertainty which markets do not like. In short, the gilt market (the cost of government borrowing) is questioning the credibility of the strategies for monetary policy at the BoE and the Chancellor’s fiscal policy. This time around it is fair to say that the headlines are much less disingenuous.
What does it mean for client portfolios?
We have no exposure to long-dated bonds, and are positioned in shorter maturities which should reflect the level of short-term interest rates rather than that of government credit risk.
Regarding the implications for UK equities, much of this is probably priced into relatively cheap valuations. Providing a long gilt sell-off reflects markets pricing in some more longer-term risk premium rather than a credit event, corporates and consumers should be reasonably insulated by funding at the shorter end of the maturity spectrum.
P.S.
The timing of the budget is a surprise when it was expected to happen in mid- to late-October. The reason might be as simple as the Chancellor genuinely needing more time to weigh up the options. Or it could be that the government wants to see the outcome of the confidence vote on Monday in France. A poor outcome for the French government would see markets talk about possible bailout packages from the EU or International Monetary Fund (IMF). If this were to happen it would give strong ammunition for Rachel Reeves to go back to the left of the party and insist on benefit cuts - the original plan - as part of her economic package.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Glossary
www.montgomeryassociates.co.uk/glossary
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