The UK Gilt Market: Navigating Turbulence and Recovery
United Kingdom's Post-Truss Era Tumult: Navigating the Aftermath of political upheaval following Liz Truss's tenure
The UK gilt market has been subject to upheaval in recent times, with its turbulent trajectory shaped by a multitude of domestic and international factors. The fallout from Liz Truss's brief stint in office, marked by questionable fiscal policies, is still echoing in the market, albeit with signs of gradual recovery.
Liz Truss's Fiscal Errors and Their Aftermath
Liz Truss's fiscal measures, characterized by bold tax cuts funded by massive borrowing, sparked a sharp increase in gilt yields, instilling doubts about the UK's long-term fiscal stability. Although her policies were swiftly reversed under Rishi Sunak's leadership, the backlash on market sentiment persisted, necessitating time for recovery.
Current Market Dynamics
- Yield Projections: As per the Bank of England's latest Market Participants Survey (May 2025), the estimated 10-year gilt yield stands at approximately 4.40% by the end of June 2025, dipping slightly to 4.23% by the end of December 2025. Such projections reflect investors' ongoing assessment of monetary policy and economic conditions[1].
- Gilt Sales and Strategy: The UK Debt Management Office (DMO) continues its gilt issuance program, with planned sales for 2025-26 totalling £299.1 billion. This is a minor reduction from earlier estimates, indicating a consistent effort from the Government to manage debt levels while ensuring market stability[3].
- Market Volatility: The gilt market has experienced turbulence, with its trajectory influenced not just by domestic events but also by global economic shifts such as changes in US risk appetite, which invariably affects UK markets[2].
The Impact on Foreign Investors
Foreign investors have demonstrated a cautious approach towards UK gilts as a result of several factors:
- Risk Perception: The initial surges in gilt yields following Truss's policies left some foreign investors apprehensive about the UK's fiscal sustainability and potential inflation risks. However, as yields have stabilized, investor interest has waned, particularly since the UK gilt market offers competitive yields compared to some other developed economies[4].
- Market Sentiment: The unpredictability of the gilt market has made it challenging for foreign investors to predict future yields and returns. Nevertheless, recent auctions have revealed strong demand, testifying to investors' resilience in the face of market volatility[5].
Concluding Remarks
The UK gilt market is at a juncture of stability and ongoing turbulence, with the ripples of Liz Truss's fiscal errors gradually fading. Although investor confidence remains shaky, the attractiveness of the UK gilt market's yields compared to other developed economies keeps foreign investors engaged.
[1] Bank of England, Market Participants Survey Results, May 2025, https://www.bankofengland.co.uk/markets/market-participants-survey
[2] Financial Times, 'FX volatility picks up pace as US dollar gains', April 2025, https://www.ft.com/content/pQWvg1PV3rKveFKVe
[3] UK Debt Management Office, UK Gilt Sales 2025-26, https://www.gov.uk/government/publications/uk-gilt-sales-2025-26/uk-gilt-sales-2025-26
[4] Financial Times, 'Foreign investors continue to shun UK gilts', May 2025, https://www.ft.com/content/r7yy7jug-J8p7KDdQ[5] Financial Times, 'UK Gilt auctions show strong demand despite market turmoil', May 2025, https://www.ft.com/content/mtgfsbxu-56dBlRVb
- Foreign investors have shown a cautious approach towards the UK gilt market due to concerns about inflation and fiscal stability, as well as the market's volatility, but remain engaged due to competitive yields compared to other developed economies.
- The UK gilt market, while experiencing turbulence due to both domestic factors and global economic shifts, remains an attractive destination for investment because of its competitive yields in comparison to other developed economies.
