Why are gilt yields rising and what does it mean for your money?

Gilt yields – effectively the level of interest that the UK government pays on its debt – rose to their highest level in almost 30 years on 5 May, amid the fallout of the conflict in Iran.

Yields on 30-year gilts reached 5.79% on 5 May and closed the day at 5.74%, marking the highest level for long-dated UK government bonds since the first quarter of 1998.

Shorter-dated gilts yields have also spiked. Yields on 10-year gilts rose to 5.11% on 5 May and closed at 5.06%. Prior to March this year – when 10-year gilt yields briefly reached 5.12% on 23 March – the last time that 10-year gilt yields rose above 5% was in July 2008, early on in the Global Financial Crisis, when they reached a peak of 5.26%.

“The UK is not alone in dealing with disruption from the Middle East but is particularly vulnerable to higher energy costs,” said Anna Macdonald, investment strategy director at wealth manager Hargreaves Lansdown. “The UK is a net energy importer and already faces some of the highest electricity and gas costs in developed markets.”

Local elections which will take place on 7 May also contributed towards the gilt yield spike.

Besides impacting the cost of government borrowing, gilt yields have an impact on your personal finances via mortgage and annuity rates. They can also be a safe investment for your portfolio, on the basis that the UK government is unlikely to default on its debt.

What are gilt yields?

Gilts are bonds issued by the UK government, and as such they are the mechanism through which the government borrows money.

Like all bonds, gilts pay regular income to their owner (who is effectively the person who has lent the government money). The amount of income they pay is fixed, but the price of a gilt can (and does) change depending on how the market perceives the government as a borrower at any given time. If the market sees the government as an attractive borrower, the price will rise, and vice versa.

The yield on any bond (including a gilt) is the amount of income it pays as a percentage of the price of the bond. So a gilt yield is the amount that a gilt pays as a percentage of its price.

When gilt prices fall, their yields rise, and vice versa. So when the market perceives the UK government as a more risky borrower, gilt prices fall, pushing yields up.

The perceived vulnerability of the UK economy to the disruption caused by the conflict in the Middle East has made gilt yields rise.

“Investors are responding by demanding a higher premium to hold UK debt,” said Lale Akoner, global market analyst at investing platform eToro. “If uncertainty persists, upward pressure on yields is likely to remain, with broader implications for borrowing costs and financial conditions across the economy.”

What do rising gilt yields mean for your money?

Gilt yields impact various aspects of the economy and your personal finances.

Higher gilt yields typically mean that mortgage rates will increase, because mortgage rates are typically linked to the yields available in the bond market.

On the other hand, higher gilt yields often mean that annuity rates increase. This could benefit people looking to buy an annuity with some of their pension savings, for a guaranteed income in retirement.

Rising gilt yields also make it more expensive for the UK government to borrow money. This could have knock-on effects in areas like reduced public spending or higher taxes over the longer term.

Should you invest in gilts given higher yields?

In general, gilts – like most forms of government bonds – are considered a very safe investment. The UK government has never defaulted on its debt.

Some argue that it never would – instead, the government might take steps that devalued the pound to the extent that inflation outweighed the value of the interest payments, which remain fixed in nominal terms.

Higher gilt yields mean that gilts are currently relatively cheap. If you are considering adding gilts to your portfolio, now isn’t a bad time – but remember that gilts are cheap for a reason. Markets are pricing in a relatively high likelihood that the UK government’s ability to repay its debt (without hurting its value in real terms) will be constrained for the foreseeable future.

If you do want to buy gilts, some investment platforms will allow you to buy them directly, or you could use an exchange-traded fund (ETF) like Vanguard’s UK Gilt UCITS ETF (LON:VGOV) which tracks an index of gilts with maturities (i.e. lifespans) of one year or more.