UK gilt yields suffer from dwindling investor appetite
UK gilt yields have gradually moved higher over August, as investor concerns over government borrowing costs and wider economic conditions continue.
While daily movements have been small, the monthly performance shows a notable sharp spike in yields, with long-dated gilts in particular recording a steep increase.
UK yields are now 1.5 per cent higher than in Greece, Spain, Ireland and Portugal.
The 10-year gilt yield is trading at 4.75 per cent today, after the Bank of England’s decision to cut interest rates to four per cent at the start of the month triggered a large sell-off in government bonds. It opened August at 4.57 per cent.
Similarly, the 20-year gilt yield is trading at 5.5 per cent, up from 5.01 per cent at the start of the month.
However, the 30-year yield has seen the most significant acceleration, pulling away from the shorter maturities and reaching its highest point since 1998.
It opened the month at 5.1 per cent but is currently trading at 5.59 per cent, reflecting weak confidence among investors for holding long-term UK government debt.
Dan Coatsworth, investment analyst at AJ Bell said: “The fact that gilt yields have gradually moved higher in recent weeks suggests that bond investors want greater compensation for the risk of holding UK government debt.”
Surge in borrowing and inflation woes
While the steady climb in yields highlights a significant shift in investor confidence in the UK’s long-term economic outlook, in particular inflation and government borrowing.
The government’s commitment to public spending has pushed up government borrowing and the country’s budget deficit.
Coatsworth said, “Bond investors are fretting about sticky inflation, interest rates potentially staying higher for longer and high levels of government borrowing.”
“Appetite has dwindled for longer-dated government debt in general, partially because of market dynamics but also because there are fewer defined benefit funds in the UK which have historically been active buyers of long-dated gilts.”