WeeklyWatch – Bonds back in the spotlight

9th September 2025

Stock Take

Bonds break into the headlines

UK investors received quite the shock last week when trading screens flashed danger red and there was a strong sense of alarm concerning a crash in the bond markets. It even resulted in a former Conservative chancellor bringing up the notion that the UK could need a bailout from the International Monetary Fund.

The yields, or interest rate, on 30-year gilts rose to a 27-year high of 5.72% after the sell-off in UK government bonds (gilts). Additionally, the pound recorded its steepest one-day decline since the start of summer against the US dollar and euro.

But as the week went on, fears began to calm. Despite this, the selling off of UK bonds impacted other markets and served as a reminder of continuous, uncomfortable problems for developed economies, not only the UK. These are issues that can’t be easily resolved.

As well as tax revenue, the UK government raises money to cover expenses by issuing gilts. When gilt yields rise, it costs the government more to service its debt. The 10-year gilt yield is used as a reference point for bank lending rates and mortgages, and now stands as the highest among the G7 group of industrialised economies.

30-year gilts are used by investors as an indicative tool with which to estimate their long-term market expectations when it comes growth, inflation and economic management. Them spiking to a level not seen since 1998 is a signal that investors’ perception of the UK’s economic prospects has broken down.

Growing concern

Under both the Conservative and Labour governments, borrowing has escalated. With a rapidly ageing population, the NHS faces a far bigger demand, and social care costs have increased. In addition, the inflation-protected ‘triple lock’ State Pension also contributes to the financial burden. Plus, a volatile geopolitical situation and increasing defence spending are also piling on the pressure.

UK productivity has been an issue for a long time, having barely grown for over a decade, falling behind big competitors like the US and Germany. Moreover, business investment is the lowest among its peers. Existing concerns are continuing to be fuelled by the government’s business strategy and further challenges in the form of higher tariffs and rising levels of unemployment.

Eyes turn to the upcoming Budget

Investors are focused on what Chancellor Rachel Reeves will have to say, as it’s been announced that the Autumn Budget will be revealed on 26th November. Reeves’ limited options have got them intrigued as she’s already ruled out increasing VAT, national insurance (NI) or income tax.

The Governor of the Bank of England, Andrew Bailey, responded to the bond market fluctuations, identifying that the government raises the majority of its borrowings by issuing ‘short-term’ debt (gilts with a lifespan of 5–10 years). While he said the rise in the 30-year yield was unwelcome, it was “not that significant” for borrowing costs.

He also drew attention to the fact that many of the UK’s issues are happening elsewhere. This week’s ‘In the Picture’ chart reveals that long-term bond yields in Germany and the US have been on an upward trend as well.

The Fixed Income Strategist at St. James’s Place, Greg Venizelos, highlighted that higher Japanese government bond yields may encourage Japanese buyers of overseas bonds (including gilts) to hold back from buying foreign bonds and even consider selling down some holdings and repatriate funds. He said:

“If you remove a key buyer (Japan) from the market, inevitably there’s less demand. Yields creep up on that basis.”

Concluding the market news

After a US national holiday, a lot of the domestic stock markets concluded the week higher – a positive sign in light of the unimpressive US data that revealed that fewer jobs were created in August than predicted. Analysts widely presume that the negative backdrop has made an interest rate cut by the US central bank later this month almost certain. And another two cuts are also likely before the end of 2025.

After a challenging week last week, the FTSE 100 made a slight recovery, ending the week higher, alongside the pound. Across Europe, shares didn’t change much over the course of the week. However, in China, a strong multi-week rally saw their shares ease. Gold increased to a new high whereas oil prices softened.

As the week concluded, global bond prices recovered some ground lost in the week as investors digested the disappointing US jobs report. But the 30-year gilt is higher than it was at the beginning of 2025, or twelve months ago. If there’s a continuous rise in yields, there are still options for the Bank of England, including as the ‘buyer of last resort’. If inflation was to decrease, confidence in government policy was to increase and the economic data improved, investor sentiment would be boosted.

Wealth Check 

The Autumn Budget is on its way – what’s in store?

The Autumn Budget will be revealed on 26th November – made official by the UK government last week. It’s taking place notably later in the year, which allows for more time to speculate what tax hikes may be implemented.

There’s a huge fiscal black hole to resolve, but due to election pledges not to raise income tax, it’s left the chancellor with a challenging budgetary tightrope to navigate. So, what are some of the changes we might expect?

  • Increased income tax, NI or VAT – This would betray one of Labour’s key manifesto promises. Although it would be an unpopular choice, increasing income tax, say of 1p in the pound, could raise much-needed revenue.
  • Reducing spending on public services – This may include making cuts to the bloated welfare bill and encouraging more people to get back into work. Many believe this is now becoming a real possibility, much to the disapproval of some.
  • ISAs – This could involve cutting the savings limit for cash ISAs.
  • Pensions – These could be impacted by the limiting of the 25% tax-free lump sum that savers currently take from their pension from the age of 55. Another option could be to reduce the level of tax relief on pension contributions which could also be used as a way to raise funds.
  • Capital Gains Tax (CGT) – These were increased in the last Budget and may see further increases in the upcoming one. Additionally, the CGT allowance may be reduced even more; it currently stands at £3,000 so any changes will appear harsh.
  • Increasing Inheritance Tax (IHT) – Limiting the benefits of tax-free gifting and freezing thresholds are both options.
  • Wholesale reform of property rates – This is believed to have been discussed. CGT may be levied on the sale of high-value homes, and a national property tax could replace council tax.

In the Picture 

Jumps in UK bond prices may have grabbed headlines, but the UK are not alone in their increased borrowing costs. Most developed countries are facing a similar issue and having to endure more expensive long-term borrowing.

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