Bond Watch: what really moved gilt yields this week
Sam Benstead breaks down the latest news affecting bond investors.
13th June 2025 09:03
by Sam Benstead from interactive investor
Fixed-income markets shrugged off this week’s Spending Review from Chancellor Rachel Reeves, which revealed how much money key departments would have over the Labour Parliament.
Gilt yields hardly budged during the announcement, but then fell when US inflation figures came in lower than expected. This caused a rally in bonds globally, as investors priced in more interest rate cuts in America.
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We also found out this week that UK GDP dropped 0.3% in April this year, the steepest monthly decline since October 2023.
Negative growth boosts the case for Bank of England interest rate cuts, which would be good news for bonds.
Therefore, fixed-income investors are being pulled in two directions. On the one hand, they are worried about increased government borrowing – all things being equal a greater supply of bonds will lead to higher yields, as the market will demand a greater return to absorb rising government borrowing needs.
Paul Johnson, director at the Institute for Fiscal Studies (IFS), said: “But if the government insists on accumulating the extra spending it’s planning over the full Parliament, it seems only fair to also draw attention to the £140 billion of extra borrowing we’re forecast to do over the same period.
“That borrowing incurs a cost in the form of additional debt interest – and one that’s bigger than it was a year ago. The question was always whether the extra investment would bring sufficient benefits to make that worthwhile.”
On the other hand, a slowing economy and lower inflation globally would bolster the case for more interest rate cuts. Traders now expect two more interest rates cuts in the UK this year, which would take the base rate down to 3.75%.
This makes existing bonds with their higher yields more attractive, leading to higher prices (and lower yields).
This tug of war has played out this year, with the 10-year gilt only slightly lower today than in January (4.53% yield today vs 4.56% at the start of the year).
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