UK Gilt Yields One Year on from the Mini-Budget

Main points

• The 10-year UK government bond (gilt) yield has been on an upwards trend since 2022 as a result of the Bank of England’s aggressive monetary tightening cycle. In the third quarter of 2023, the 10-year gilt yield has fluctuated around 4.4 per cent, driven by short-term interest rate expectations. Overall, the UK term premium signals that investors are feeling confident about the path of short-term interest rates
• One year on from the ‘mini-budget’, our latest estimates indicate that while gilt dynamics were largely driven by short-term interest rate expectations during the weeks before and following the mini-budget, the UK term premium did rise in this time and contributed to raising the gilt yield further. It is also important to note that our estimates suggest that this rise in interest rate expectations and the term premium was a ‘blip’ that corrected rather quickly. Thus, though the gilt yield is now at a similar level as a year ago, bond market dynamics have changed significantly, one year on
• In September, the Federal Open Market Committee (FOMC) in the United States and the Monetary Policy Committee (MPC) in the United Kingdom opted to maintain their policy rates, while the European Central Bank hiked interest rates by 25 basis points. With all three central banks’ policy rates potentially at, or close to, their peak level in this global monetary tightening cycle, uncertainty has begun to rise in markets. This is not entirely surprising, given that the questions of whether policy rates have peaked and, once there, how long policy rates should be maintained at peak and the pace at which to loosen, remain contested. Improved communication around these issues may help to prevent further uncertainty seeping into term premia.

“While the 10-year UK government bond (gilt) yield is now at a similar rate as that observed a year ago following the aftermath of the ‘mini-budget’, our latest estimates suggest that elevated interest rate expectations generated a stable upwards trend in the gilt yield in the third quarter of 2023, in line with the MPC’s monetary tightening cycle. Overall, the UK term premium signals that investors are feeling certain about the path of short-term interest rates, though this certainty has decreased somewhat in recent weeks. This contrasts significantly to last September’s gilt market dynamics, which were driven by volatile, but temporary, increases in short-term interest rate expectations and the term premium.”

Paula Bejarano Carbo, Associate Economist