UK Gilts: A Generational Buying Opportunity? Analyzing the Bond Market Surge

UK Gilts: A Potential Buying Opportunity Emerges

Bond markets have taken center stage this week, with yields on several long-dated bonds hitting multi-decade highs. One fund manager has described this as a "generational opportunity" for UK gilts.

The UK's 30-year gilt yield touched 5.723% on Tuesday, its highest level since 1998, while the country's 10-year gilt yield also reached its highest point since the start of the year at 4.835%. Meanwhile, the 2-year gilt yield has retreated from 4.379% in January to around 3.95%.

James Carter, fund manager at W1M, said on Wednesday, "The term premium, which is the return you get on the long end of the yield curve relative to the short end, is unusually high, particularly in the UK. That means a lot of bad news is already priced into the market."

Volatility in the UK Gilt Market

The UK gilt market has experienced significant volatility on both ends in recent years, from the 2022 “mini-budget” crisis under then-Prime Minister Liz Truss to sharp spikes in July amid uncertainty over the future of Chancellor Reeves. Recent decreases in demand from UK pension funds, as they reduce their holdings of 30-year gilts upon maturity, have also contributed to this volatility.

Carter believes the volatility in the UK gilt market “is likely to remain elevated when sentiment is as low as it is today, but we need to try and look through that and focus on the value opportunities that government bonds offer, particularly in markets like the UK… that’s a great buy signal.”

Comparison to the 1970s Crisis

Carter pointed out that the results of UK gilt auctions contrast sharply with the picture painted by some public discussion about the UK being in a similar crisis to the 1970s, with auctions showing demand at around three and a half times the issuance size. In the 1970s, the pound collapsed, and the country was forced to seek a loan from the International Monetary Fund (IMF).

Commitment to Fiscal Discipline

Bond vigilantes have made it clear they will not tolerate fiscal largesse in the UK like in economies such as the U.S. But Carter says the government has responded to this by repeatedly emphasizing its fiscal rules.

He stated, “Once the bond market starts to believe that, and the Autumn Budget is another opportunity for them to deliver that message. I.e., in a world where everyone else is increasingly flooring the fiscal gas pedal, ‘we are safe.’ That could provide a bid for UK gilts.”

Carter added that if the Bank of England decides to slow the pace of quantitative tightening, this situation would intensify, because “there’s no sense selling gilts when prices are 50% off their 2020 highs. If the government can continue to push the narrative of ‘things aren’t as bad as they seem.’ I believe that buying government bonds at a 2.5% to 3% real yield is a generational opportunity for investors.”

UK vs. Other Markets

Carter also emphasized that he does not see the same opportunities elsewhere. He believes Japan is unattractive from a real yield perspective, while the U.S. is in a bleak fiscal situation, with its long-term risk premium lackluster and potentially pushed higher by former U.S. President Trump’s attacks on the Federal Reserve independence and inflation concerns.

In the Eurozone, he says upcoming German defense and infrastructure spending will pressure bond yields. Meanwhile, France faces difficulties passing budget bills, along with public unwillingness to accept the spending cuts or tax increases required to change its economic fundamentals.

In a report on Tuesday, UBS strategists Giles Gale and Reinout De Bock called the UK “one of the most interesting rates markets in the terminal phase of 2025.”

“The long end is cheap. It also potentially has risks – the budget could be a particular risk, and demand could be weak,” they said. “We think a lack of UK fiscal flexibility is likely to drive the need for additional taxes. Everyone knows that the market currently prices them either as insufficient, not credible, or inflationary. The risk is that any holes get filled, and any fiscal drag is good for rates.”