Gilt yields give Chancellor a turbulent start to 2025
Chancellor Rachel Reeves has not enjoyed the happiest of starts to 2025 with calls in some quarters for her to even be removed from her post.
While this is unlikely to happen any time soon, there is no question that this Government’s management of the UK economy is under intense scrutiny as the fallout from last November’s Budget decisions continues to reverberate.
Central to the Budget is the approach of increased taxes to enable greater public spending, something the Government believes is vital if it is to achieve its oft stated goal of turbo-charging growth in the economy.
The UK, as with other countries, has begun the new year with sharp rises in gilt yields.
Governments generally borrow money by selling bonds to big investors, such as pension funds. UK government bonds are known as gilts.
The yield on the 10-year gilt – the interest rate at which the government pays back a decade-long loan to investors – dropped marginally to 4.88% on Tuesday, having risen to nearly 4.9% on Monday, its highest level for 17 years.
Meanwhile, earlier this week the 30-year gilt yield stood at 5.46%, itself the highest rate for over 25 years.
This level of turbulence is unusual as gilts are normally considered very safe with little risk that money will not be repaid. The higher the rate the riskier the markets feel the repayment is over the agreed period whether that is 10, 20 or 30 years.
While Chancellor Reeves’ handling of the UK economy is under the microscope, it is also the case that government debt costs in countries such as Germany, France and Italy have also been rising.
Some commentators believe that the decisions announced by the Chancellor in last year’s Budget have, potentially, made our economy more vulnerable.
After a bruising few days, there was some more positive economic news yesterday with the UK inflation rate falling slightly from 2.6% to 2.5% which led to renewed hopes that a further cut in interest rates might be feasible. The unexpected fall in the inflation rate had the knock-on effect of a drop in gilt yields.
Despite this, there is undoubtedly an uptick in economic volatility in the UK and globally. With President Trump being inaugurated for the second time on Monday, the world will be watching to see if he follows through on the threat to impose stringent tariffs on the import of goods into the United States.
We will continue to monitor events at home and abroad, but, as ever, with our focus ensuring our clients are taking a long-term, diversified approach to their financial planning which factors in the inevitable ebbs and flows of the global economy and the reaction of the markets.
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