What’s happening?
The cost for the UK Government to borrow over the long-term, represented by the yield on 30-Year Gilts, today reached a 27-year high. The UK is not alone in this phenomenon, bond markets globally are under pressure with long-term government bond yields rising everywhere. The chart below shows 30y bond yields over the last 10 years in the UK, US, Germany, France and Japan.
Yields began rising dramatically in 2022 when central banks increased interest rates in response to high levels of inflation and government spending. This was especially true in the UK, remember the Truss/Kwarteng mini budget in September 2022? Yields are now higher than in 2022 despite recent rate cuts from most central banks which have only lowered short-dated yields.
30-Year Government Bond Yields
Source: LSEG Datastream, North Capital Management. As at 02 September 2025.
Why are long-dated bond yields rising?
1. Rising government deficits and public debt
- This occurs when governments spend more than they take in from taxes. To fill the gap, they sell more bonds.
- When more bonds are supplied to the market, investors demand higher yields to buy them.
2. Central bank credibility is being challenged
- They are cutting rates at a time when the decline in inflation which followed the post-pandemic price shock has ended. Inflation is above the 2% target again in the US (2.6%) and the UK (3.8%). Wage growth is still above inflation and above pre-pandemic levels, supporting consumer demand for goods, while some firms are raising prices in response to tariffs.
- If central banks ease rates too soon, investors fear inflation will remain above target and erode the real (i.e. inflation-adjusted) value of their investments. Therefore, investors are demanding more compensation for this risk via higher bond yields.
3. Quantitative tightening
- For years, central banks bought bonds to hold yields down (quantitative easing). This helped to keep mortgage rates, car loans and business borrowing rates low.
- Now they are shrinking balance sheets so investors must absorb more bond supply.
What’s our view and how are we positioned?
Currently we have more concerns about inflation and fiscal deficits than a global recession because we expect these high levels of government spending to continue as it seems politically unpalatable for any government to cut back. Much of government spending, for example on healthcare, social security and defence, is very difficult to curtail. In the UK, as we approach the Autumn Budget in late November, its seems that Chancellor Reeves is under pressure from her party not to drastically cut government spending and recent events have proven that with proposed cuts to welfare failing to pass. In Germany, leaders have committed to increased government spending, encouraged to allocate more to defence by actions taken by the US administration.
However, if we are wrong, our overweight allocation to gold is expected to perform well as it has historically proven to be resilient in both weak growth and high inflation environments. Additionally, as gold is priced in USDs, there is an added benefit if the UK, and Sterling, is most in the firing line from any bond market turmoil – a near-term risk as we approach the Autumn Budget.
We believe equities can continue to perform well over the medium-term as company cashflows can benefit from inflation. There are, however, short-term risks that disorderly moves in the bond market catalyse a retreat from risk assets. Regarding bonds, our portfolios are heavily underweight government bonds. Our exposures are skewed towards short-dated bond funds, across the credit spectrum and inflation-linked bonds. This means we have limited direct exposure to the issues described above.
