As Gilt yields remain broadly unchanged as a result of the Budget, Hal Cook, senior investment analyst, Hargreaves Lansdown, has weighed in on what this could mean for the market.
All bond investor eyes in the UK are on gilt yields for Budget day. Yields spiked a little initially, but the market has been sanguine since in the build up to Reeves’ speech.
The leak of the OBR forecasts caused some volatility, falling then rising before falling again as the speech began. The 10-year is under 4.45% at the time of writing (they closed at 4.5% yesterday), putting it near the bottom of its range so far in 2025. Moves of 0.05% are relatively common.
Over 2025, there have been two trends in gilt yields. Short-dated yields of up to 5 years have generally fallen while medium and long-dated yields (10-year and longer) have been broadly range bound (while very long-dated yields had been on an increasing trend until September, moves since then have brought them back down below where they started the year).
During October, in the build up to the Budget, yields fell across the board. This reflected expectations that the Budget was going to contain notable tax increases and bring greater confidence in the government’s ability to balance the books in future. These falls were scuppered earlier in November when it was leaked that expected income tax rises had been scrapped, leaving investors scratching their heads as to how the government was going to increase revenues.
Coming into today, gilt investors were hoping for measures that allowed them to have greater confidence in fiscal responsibility going forward, which would have allowed yields to fall (and prices rise). So far, the government hasn’t provided much by way of surprises for bond investors, evidenced by the relatively small moves in yields so far. As ever though, the devil will be in the detail so things could over the coming hours and days.
Why do gilt yields matter?
When the government wants to borrow money, it issues Gilts (UK government bonds) to the bond market. Bond investors demand interest in return for lending the government money. Gilt yields are the interest rate that the UK government has to pay in order to borrow money.
The UK has had a budget deficit for many years – meaning they’ve spent more than they have received in revenues. In fact, there’s only been 5 years since 1970/71 where there has been a budget surplus in the UK, and the last time this happened was 2000/01.
When the government spends more than it receives in revenues, it has to borrow to make up the difference. The gilt yield matters because it impacts the cost of borrowing – the higher the yield, the higher the cost of borrowing.
Importantly, changing gilt yields don’t impact the cost of debt already issued. But they do impact the cost to borrow in future. And it’s common for the government to have to refinance previous borrowing as gilts mature and large maturity payments become due. If they’ve borrowed cheaply in the past and it costs them more to borrow today, as they refinance historic debt, their interest costs will increase. The opposite is also true.
Fundamentally, higher costs of borrowing could reduce future government spending.
This is why governments worry so much about their bond yields. We’ve seen a couple of events in recent years where changes in bond yields have forced a change in government policy. The most obvious was the Truss / Kwarteng mini-Budget in 2022. But the US had a similar issue in April, following Liberation Day, with rises to US Treasury yields cited as one potential reason Trump backed down from his initial tariff implementation date of 9 April.
Following the Spring Statement in March, it was estimated that the UK Government would need to issue £300bn of gilts in the 2025/26 tax year. The figure for 2026/27 was slightly lower in the region of £275 billion.
Below we show the potential interest costs on this level of borrowing and the impact of different gilt yields:
| Value of gilts issued (bn) | 10-year gilt yield (assumed cost of debt) | Annual cost (bn) | Cost over 10 years (bn) | |||
| 2025/26 | £300 | 4.5% | £13.5 | £135 | ||
| 2026/27 | £275 | 4.5% | £12.4 | £124 | ||
| Total | £25.9 | £258.8 | ||||
| 2025/26 | £300 | 3.5% | £10.5 | £105 | ||
| 2026/27 | £275 | 3.5% | £9.6 | £96 | ||
| Total | £20.1 | £201.3 | ||||
| 2025/26 | £300 | 5.5% | £16.5 | £165 | ||
| 2026/27 | £275 | 5.5% | £15.1 | £151 | ||
| Total | £31.6 | £316.3 | ||||
If the average cost of debt reduces by around 1%, this would save the government roughly £6bn in interest costs per year for gilts issued in the two financial years from 2025-2027. The opposite is also true. In a world where big numbers get thrown about without much consideration for their size, it’s worth just reiterating that £6 billion is £6,000,000,000. That’s the equivalent of 120,000 government employees (teachers, nurses, police officers etc) at an average salary of £50,000. Gilt yields matter and not just for investment returns.
