Gilts: Why UK Government Bonds Still Pay More Than US Treasuries — And Whether the Premium Is Worth It

The numbers tell a clear story of divergence. UK long-term gilt yields have traced a gradual downward path from their September 2025 peak of 4.69% to 4.45% in January 2026 — a decline of just 24 basis points over four months. Across the Atlantic, the US 10-year Treasury has moved more aggressively, dropping from 4.29% in early February to 4.08% by February 19.

This differential matters. For an investor allocating £100,000 to government bonds, the additional 37 basis points of annual income from gilts versus Treasuries translates to roughly £370 per year — not transformative, but meaningful in a world where yield is scarce and every basis point counts.

The chart above illustrates the core dynamic: while the Federal Reserve has been aggressively cutting rates — moving from a plateau of 4.33% through the first eight months of 2025 to 3.64% by January 2026 — UK gilt yields have been remarkably sticky. This stickiness reflects both the Bank of England's more cautious approach to easing and persistent structural pressures on the UK's fiscal position.

The Federal Reserve's easing cycle has been one of the most aggressive in recent memory. From its peak of 4.33%, where it held steady from February through August 2025, the Fed has delivered a cumulative 69 basis points of cuts by January 2026. The pace accelerated through the autumn, with successive reductions in September, October, November, and December reflecting growing concerns about the labour market and the drag from tariff-related uncertainty.

The Bank of England has followed a notably different script. While the BoE began its own cutting cycle in 2025, the pace has been measured. UK inflation has proven stickier than its American counterpart, with services inflation remaining elevated and wage growth, while moderating, still running above the Bank's comfort zone. The result is a policy rate that remains relatively restrictive, keeping gilt yields elevated.

This divergence has direct implications for the yield curve. The US 10-year to 2-year Treasury spread has compressed from 0.74% on February 5 to just 0.60% by February 20 — a meaningful flattening that signals growing market anxiety about the growth outlook. The 2-year Treasury yield, at 3.47%, now sits well below the 10-year at 4.08%, but this spread is narrowing fast.

For gilt investors, the message from the US yield curve is cautionary. A flattening yield curve historically presages weaker economic growth, and given the UK economy's sensitivity to global trade conditions, weakness in the US would likely spill over to the UK — potentially forcing the BoE into faster cuts and pushing gilt yields lower.

One of the key reasons gilts trade at a premium to Treasuries is the UK's fiscal position. While both countries carry substantial debt loads, the UK faces a more constrained fiscal path. The Autumn Budget and subsequent Spring Statement have outlined a fiscal tightening that relies heavily on growth materialising — growth that is by no means guaranteed in the current environment.

The Debt Management Office's gilt issuance programme remains heavy, with net financing needs elevated by infrastructure spending commitments and the ongoing cost of servicing index-linked gilts in an environment where inflation, while declining, has not returned to target. The UK's debt-to-GDP ratio, hovering near 100%, creates a structural floor under gilt yields that doesn't exist to the same degree for US Treasuries, where the dollar's reserve currency status provides an inherent demand buffer.

Crucially, the premium also reflects currency risk. Sterling's vulnerability to trade policy shifts, UK-specific fiscal events, and the BoE's policy stance means that international investors demand compensation for holding gilts over Treasuries. This risk premium is unlikely to disappear even as both central banks continue their easing cycles.

The past week has delivered a seismic shift in global trade policy. The US Supreme Court's 6-3 ruling striking down President Trump's reciprocal tariffs was initially cheered by markets — but the celebration was short-lived. Within hours, the President announced a new executive order imposing a 15% global tariff, a move designed to circumvent the Court's ruling while maintaining trade pressure.

For UK gilt markets, the implications are layered. Reports indicate that UK firms face significant uncertainty following the Supreme Court ruling, as the new 15% levy creates a fresh set of challenges for exporters. The UK, which has been negotiating its post-Brexit trade relationships carefully, now faces the prospect of higher barriers to its largest single export market.

The bond market response has been telling. The US 30-year Treasury yield has dropped from 4.91% on February 4 to 4.70% by February 19 — a 21 basis point decline that reflects flight-to-safety demand and growing expectations that trade disruption will weigh on long-term growth. For gilts, the picture is more nuanced: UK bonds benefit from safe-haven demand during periods of uncertainty, but the UK economy's openness to trade makes it more vulnerable to tariff escalation than the relatively closed US economy.

US CPI data shows inflation running at a moderate pace, with the consumer price index rising from 326.031 in December 2025 to 326.588 in January 2026 — a 0.17% month-over-month increase that suggests tariff-related price pressures have not yet materialised in earnest. But with a new 15% global levy on the horizon, the inflation outlook for both the US and UK could shift materially in coming months.

For income-focused investors, UK gilts present a genuine case. The 37 basis point yield advantage over US Treasuries, combined with the potential for capital gains if the BoE accelerates its cutting cycle, makes gilts an attractive proposition in the current environment. The downward trajectory from the September 2025 peak of 4.69% to today's 4.45% suggests the trend is already in motion.

However, there are meaningful risks to weigh. First, sterling depreciation could erode returns for unhedged international investors. Second, the UK's fiscal position creates tail risk — any deterioration in the government's borrowing forecasts could push gilt yields higher, not lower. Third, the trade policy environment introduces a new wildcard: if the 15% global tariff leads to retaliatory measures or a broader trade war, the UK economy could face a stagflationary squeeze that complicates the BoE's easing path.

The bull case rests on the view that the BoE will ultimately follow the Fed's lead, bringing UK rates down more aggressively in the second half of 2026. If that materialises, current gilt yields of 4.45% will look attractive in hindsight, and investors who locked in these rates will benefit from both income and capital appreciation as prices rise.

The bear case centres on fiscal risk and inflation persistence. If UK inflation proves stickier than expected, or if the government's borrowing needs increase, the yield premium over Treasuries could widen further — but for the wrong reasons. In that scenario, gilt holders would face mark-to-market losses even as their coupon income remains intact.

On balance, the current yield premium appears to fairly compensate for the incremental risks of holding gilts over Treasuries. But investors should remain nimble — the trade policy landscape is shifting faster than central banks can respond, and the gilt market will not be immune to the fallout.