UK Gilts Analysis

UK gilt yields across the maturity spectrum remain near multi-year highs, reflecting a combination of restrictive monetary policy, heavy government issuance, and elevated term premia. As of 12 February 2026, the 10-year gilt yielded approximately 4.48%, while the 20-year gilt stood at 5.17% and the 30-year at 5.29%. The spread between the 10-year and 30-year maturities — approximately 81 basis points — underscores the exceptionally steep curve that has characterised the UK market since mid-2025.

The trajectory over the past two years tells a story of persistent upward pressure on long-term rates. FRED data on UK long-term government bond yields (IRLTLT01GBM156N) shows the monthly average climbed from 3.93% in January 2024 to 4.69% in September 2025 before easing modestly to 4.48% by December 2025. That September peak coincided with a global selloff in long-duration sovereign debt, driven by rising term premia across advanced economies.

Compared with the US, UK gilts trade at a meaningful premium. The US 10-year Treasury yielded 4.18% on 11 February 2026, placing the UK-US 10-year spread at roughly 30 basis points. This gap reflects the UK's relatively higher inflation, heavier borrowing needs, and the Bank of England's slower easing cycle compared with the Federal Reserve, which has already cut the Fed Funds Rate from 4.33% to 3.64%.

The US yield curve has re-steepened into positive territory, with the 2s10s spread at 0.62% as of 12 February — its widest level in months. The US 2-year Treasury at 3.52% reflects expectations for further Fed easing, while the 10-year remains anchored by inflation expectations and fiscal concerns. The UK curve displays a similar pattern but with considerably more steepness, as markets price in persistent supply pressure at the long end.

The MPC's 5–4 vote to hold Bank Rate at 3.75% on 4 February was far closer than the 7–2 split most economists had anticipated, and the implications for the gilt market are significant. Four members — nearly half the Committee — were ready to cut rates immediately, signalling that the balance of opinion has shifted decisively toward easing.

The accompanying Monetary Policy Report was notably dovish in its assessment of the inflation outlook. CPI inflation stood at 3.4% in December 2025, down from 3.8% in September, with the MPC projecting a further decline to around the 2% target from April. This prospective drop is primarily driven by energy price base effects and measures from Budget 2025, rather than a sustained improvement in underlying price pressures. Services inflation remains sticky at 4.5%, and core CPI held at 3.2% in December — both above target-consistent levels.

Crucially, the MPC acknowledged that "the risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening labour market remain." The UK unemployment rate has risen to just over 5%, and GDP growth registered a disappointing 0.1% in Q4 2025 — well below the 0.2% consensus forecast. Annual growth of 1.0% marked the slowest pace of expansion since Q2 2024.

The Committee's forward guidance stated explicitly that "Bank Rate is likely to be reduced further," though it cautioned that "judgements around further policy easing will become a closer call." Markets have responded by pricing approximately 75 basis points of further cuts in 2026, which would bring Bank Rate to 3.00% by year-end. The next MPC meeting on 19 March is live for a cut, with BNP Paribas among those forecasting action as early as next month.

Since August 2024, Bank Rate has been reduced by a cumulative 150 basis points — from 5.25% to 3.75%. For gilt investors, the key question is whether the pace of easing accelerates from here. Private sector regular pay growth has moderated to 3.6%, and Agents' pay survey data points to settlements of 3.4% this year — approaching target-consistent levels. If these trends continue, the case for faster cuts strengthens, which would be particularly supportive for short-to-medium maturity gilts.

The fiscal backdrop remains the most significant headwind for long-dated gilts. The UK government is issuing £303 billion of new bonds in the 2025–26 fiscal year, an increase of £4.6 billion from the prior year. Public sector net debt stood at a provisional £2,928 billion — or 95.6% of GDP — at the end of November 2025, with annual debt servicing costs running at approximately £110 billion.

These figures place the UK among the most heavily indebted major economies, and the scale of issuance required to fund ongoing deficits and refinance maturing debt is weighing on long-end yields. Morgan Stanley strategists have argued the government should double its issuance of Treasury bills to ease strains in the gilt market, noting that a shift toward shorter-dated instruments would reduce average funding costs while diversifying the investor base.

The shift is already underway. The share of short and ultra-short gilts in total issuance has risen from 29% in the decade before the pandemic to 34% in recent years. While this reduces immediate borrowing costs, it also increases refinancing risk — a larger fraction of total debt is now subject to more frequent rollover, making the government's finances more sensitive to short-term rate movements.

Adding to supply pressures is the Bank of England's ongoing quantitative tightening programme, which is running at a pace of £70 billion per year (October 2025 to September 2026). The BoE still holds more than £500 billion of gilts acquired during successive rounds of QE since 2009. Former policymakers have urged the Bank to stagger these sales more carefully to avoid overwhelming market demand, and the interaction between government issuance and BoE gilt sales represents one of the key risks for bondholders.

Chancellor Rachel Reeves emerged from the November 2025 Autumn Budget with improved fiscal headroom relative to the government's self-imposed fiscal rules — a development that initially calmed bond markets. Gilt yields fell through Q4 2025, with the 10-year yield declining from its September peak of approximately 4.80% to end the year near 4.50%. However, with public debt forecast to rise to 96.1% of GDP by 2029–30, the trajectory remains concerning for longer-term investors.

The UK's gilt market does not exist in isolation, and much of the yield elevation observed over the past 18 months reflects global dynamics. A Bank of England analysis published in January 2026 found that higher real term premia — the additional compensation investors demand for holding long-term bonds rather than rolling short-term instruments — were the primary driver of rising UK long rates throughout 2025.

This increase in term premia was largely attributed to global factors: geopolitical uncertainty, trade policy disruption, and fiscal sustainability concerns across advanced economies. Global sovereign bond issuance has been at historic highs, with the US, UK, France, Italy, and Japan all running significant deficits simultaneously. In this environment, investors have demanded greater compensation for duration risk, pushing up yields at the long end of curves worldwide.

The UK has been particularly affected because of several amplifying factors. First, the relatively higher level of UK short rates — Bank Rate at 3.75% versus the ECB's 2.00% — pushes up the entire curve. Second, index-linked gilts, which account for £631 billion of the Debt Management Office's £2,558 billion portfolio, expose the government to inflation-linked interest costs that can spike during periods of above-target CPI. Third, the BoE's QT programme creates supply that does not exist to the same degree in other jurisdictions.

Despite these headwinds, UK gilt yields offer a significant premium over eurozone peers. Germany's 10-year Bund yields approximately 2.85%, nearly 160 basis points below the equivalent UK security. For international fixed-income investors, this spread creates relative value opportunities — provided they are comfortable with the additional currency and political risk. The Bank of England noted that UK long rates ended 2025 at the top of levels observed across global peers, a position that reflects both risk and opportunity.

For individual investors, the current gilt market presents a compelling but bifurcated opportunity. The front end of the curve offers attractive yields with the added tailwind of expected rate cuts, while the long end delivers higher income but carries meaningful risks from supply dynamics, political uncertainty, and the potential for further term premium expansion.

Short-dated gilts (maturities of 1–5 years) stand to benefit most directly from Bank of England easing. With markets pricing approximately 75 basis points of cuts over 2026, bond prices in this segment should rise as yields fall. The Morningstar UK Gilt Bond Index gained 5% in 2025 — its best year since 2020 — driven largely by front-end performance as Bank Rate dropped from 4.75% to 3.75%. A continuation of this easing cycle would support further gains, though the magnitude will depend on the pace and scale of cuts.

Long-dated gilts (20–30 years) offer yields above 5%, which represents genuine income in an environment where UK CPI is expected to fall toward 2% in the second half of 2026. The real yield — the nominal yield minus expected inflation — is among the most attractive in the developed world. However, investors must weigh this against several risks.

The primary risk is a return of political volatility. Prime Minister Keir Starmer's low approval ratings and the local elections scheduled for 7 May could trigger leadership speculation within the Labour Party. A perceived shift toward less fiscally conservative leadership would likely widen long-dated gilt yields, as markets saw during multiple episodes in 2025. The Spring Statement and Autumn Budget 2026 are additional potential flashpoints.

Supply risk remains persistent. The combination of £303 billion in government issuance and £70 billion in annual BoE gilt sales means the market must absorb significant volumes. Any deterioration in demand — whether from foreign investors reallocating or domestic pension funds adjusting their liability-driven investment strategies — could push long-end yields higher.

A practical approach for individual investors might include overweighting the 2–7 year segment of the gilt curve, where the combination of rate cut tailwinds and manageable duration risk offers the best risk-adjusted return. Those seeking income could selectively add longer-dated exposure, recognising the higher volatility inherent in that segment. Index-linked gilts may appeal to investors concerned about inflation persistence, though their premium to conventional gilts has narrowed as inflation expectations moderate.