Right now, British politics and the bond market have become essentially the same story, and the question every fixed income manager needs to answer is whether the 10-year gilt yield is heading to 6%.
Luke Hickmore, Investment Director, Fixed Income, at Aberdeen, shares his insights.
The short answer is yes, it’s possible. We are hovering around 4.92% today. The World Government Bonds forecast model has the 10-year at 5.85% by September 2026 and 6.18% by March 2027. That is a trend extrapolation and three forces are driving it simultaneously.
Fiscal credibility
The OBR’s £22 billion of headroom is already under pressure. Every 100 basis points of yield rise costs the government roughly £10 billion annually in debt interest by 2030. We are already 64 basis points higher than at the start of 2026. A successor government that signals even a modest loosening of fiscal rules could see the OBR’s projections flip from “manageable” to “the rules are already broken” worth another 50-75 basis points on 10s on its own.
The Truss premium and the global backdrop
Markets haven’t forgotten 2022. There is a structural premium in gilts versus peers that reflects the UK’s recent history and that premium will not compress whilst there’s uncertainty in Westminster.
Brent crude is currently around $105. As a net energy importer, higher oil and gas feeds directly into UK inflation and limits the Bank of England’s ability to cut rates. Markets are pricing in three additional rate hikes before year-end, the opposite of what was expected at the start of 2026.
Combine eventful UK politics with oil staying bid and a Bank of England unable to cut, and 6% on the 10-year starts to look less like a tail risk and more like the central case.
What 6% would actually mean
The last time the 10-year gilt traded at 6% was in 2000. At that level, annual debt interest costs would approach the NHS budget. The government’s fiscal rules would be in tatters. An emergency Budget, almost certainly involving spending cuts or substantial tax rises, would become unavoidable.
The spectre of September 2022 looms large. Would the Bank of England intervene in the gilt market again? The critical difference this time is that inflation remains elevated. The Bank cannot simultaneously cut rates and stabilise the gilt market, it would be forced to choose.
The base case, the bull, and the bear
Most analysts are not yet calling 6% as their central scenario. The base case is probably a range of 5.0-5.5% over the next six months, with 6% a credible tail that hardens into a base case under specific conditions: a new leader, oil above $110, and a fiscal statement that materially loosens the rules.
The bull case, for those of us with duration, is a stable leadership that surprises on fiscal discipline, a Middle East ceasefire that takes oil back to $90, and two Bank of England cuts before year-end. On that path, 4.75% becomes achievable again.
What this means for sterling fixed income
For portfolio managers running sterling credit and rates, this is the most consequential political story since the Truss mini-budget. Duration carries real risk until leadership clarity emerges. The front end looks more attractive than the back, the 2-year can outperform if the Bank eventually cuts even in a politically turbulent environment. Floating rate and short-dated credit offer better risk-adjusted carry in the interim.
The 30-year is particularly exposed. At around 5.6%, it is near 28-year highs, and there is no natural floor under the long end if a new government signals expansionary fiscal policy. The spread between 30-year gilts and 30-year US Treasuries has already widened from 60 to 78 basis points in just two sessions this week. If that pushes toward 100 basis points, that is the canary in the coal mine.
Conclusion
The gilt market is pricing a risk premium not seen since before the financial crisis. The question is whether or not a Starmer successor, competing for party members and trade unions rather than bond markets, will stabilise the situation.
6% is not inevitable but British fixed income investors have to price it seriously.
