Gilt Yields Are Rising, What Will That Mean?

Published / Last Updated on 01/10/2021

The standard 10 Year Treasury Stock Gilt yield has risen back to 1%pa.  This means it will cost the British government more in interest (coupon) debt repayments when borrowing more money.

What has caused the gilt yield rise?

Higher demand pushes prices up and yield returns down.  E.g. If you own a property and you bought it for £100,000 and then rent it out for £500pm, that’s £6,000 pa.  This is a gross yield of 6%pa.  Where demand for property has pushed the price up to say £130,000 but the market rent is still £500pm, if a new purchaser bought your property for £120,000 and the rent was still £6,000pa, the yield has now fallen to 5%pa from 6%pa.

This is the same for gilts and government bonds.  There has been high demand as central banks are buying back £billions in gilts via quantitative easing, creating a shortage in the market.  Demand pushed prices up and yields down.

In the UK, last year the 10 year fixed rate gilt yield was only 0.2%pa i.e. making new borrowing very cheap for the government during the pandemic.  It was buying back its old, expensive debt and borrowing new money extremely cheaply.

The Bank of England, along with other central banks, is looking to water down its QE Buy Back programme, as is the UK and the EU.  In addition, it looks likely that interest rates will rise.  This means that demand for gilts and government bonds is now falling.  This in turn will push capital values down and yields up.

Last year:  UK Gilt yields 0.2%pa, USA government bonds 1.31%pa yield, German Bunds -0.44% yield.  Now, as demand falls, capital values have fallen and yields have risen: UK Gilt yields 1.0%pa, USA government bonds 1.53%pa yield, German Bunds -0.19% yield.

Many will know that we have been ‘red’ i.e. negative for fixed rate funds (including fixed rate gilts) for some time now as we expected this and capital values to fall.  This happened but not we are more likely to be more positive towards gilts and fixed rates although interest rate rises may push gilt yields/interest rates even higher.  This may push capital values of gilt and fixed interest funds down even further.

Impact of Higher Gilt Yields

  • Annuity rates to rise
  • Cash equivalent transfer values for defined benefit transfers to fall.
  • Index linked gilt fund capital values to rise but then fall back with any interest rate increases.
  • Fixed rate gilt and bond fund capital values to fall with any interest rates increases.

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