Bond market turmoil earlier this month drove the UK 10-year gilt yield up to 4.9%, the highest figure recorded since 2008.
The gilt yield has since dipped slightly to 4.6% as the government has sought to reassure a jittery market, but Chancellor Rachel Reeves has faced pressure to announce tax and spending changes in response to the higher cost of government borrowing.
But what does all this mean for your finances? Read on to find out what triggered the bond market drama, the impact on pensions and savings, and whether bonds could be a good investment option.
Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of a provider before committing to any financial products.
What is a bond?
Bonds are issued by governments to raise money to finance projects or day-to-day operations. Bonds issued by the UK government are called ‘gilts’.
If you buy a gilt, the government will pay you a regular income in the form of interest payments (called ‘coupons’) for a set number of years until the gilt matures and the government repays your initial investment.
The total amount you receive is called the ‘gilt yield’. For example, if you paid £100 for a gilt with a coupon payment of 4% for 10 years, the gilt yield would be 4%.
Once launched, government bonds can be bought and sold on the open market, where their price may vary from the initial launch price.
For the basics, see our full guide on investing in bonds.
What’s happened to the bond market?
Gilts had already been trading on higher yields thanks to the current Bank of England (BoE) base rate, which is relatively high at 4.75%.
However, when the BoE sold another £750m of bonds last week, it reduced the price of bonds and drove up the yield.
Quantitative tightening
The BoE is currently pursuing a policy called quantitative tightening (QT).
Under QT, the BoE is shrinking its balance sheet by selling around £100bn worth of held government debt – in the form of bond sales – every year.
Selling the bonds on the open market reduces the amount of money in the economy, which in theory reduces the risk of runaway inflation as people are incentivised to save more and spend less.
However, this is causing a headache for the Treasury because, in combination with the UK’s weak economic growth, it’s driving up the government’s borrowing costs.
The Chancellor has the power to force the BoE to halt bond sales or to lower interest rates, but Ms Reeves is unlikely to do so.
UK 10-year gilt yield
The graph below shows how the UK 10-year gilt yield has changed since last June.
What does it mean for your pension?
Annuity rates and gilt yields tend to move in lockstep, so anyone thinking about purchasing an annuity could see better rates on offer.
However, falling bond prices will be a concern for anyone approaching retirement who is invested in a ‘lifestyling arrangement’ pension, as these plans move members out of equities and into bonds the closer they get to retirement.
Similarly, retirees with a drawdown pension that is heavily exposed to the bond market may also be impacted. If you’re in this position, you may wish to hold off drawing an income until the market calms. It’s worth taking expert advice on your options if you’re unsure.
- Find out more: annuities vs pension drawdown
What does it mean for savers?
Savings rates are much more strongly influenced by the BoE base rate, and where the market expects the base rate to go over the next 12 months.
Returns on cash savings could see a small boost from the high gilt yield, but with the market pricing in at least two base rate cuts this year, savers shouldn’t hang around in the hope of better rates down the road.
- Find out more: best savings accounts 2025
Cash savings vs gilts
As of the time of writing, the top one-year fixed savings account is offering an interest rate of 4.77% and the top one-year Isa is offering 4.55%.
The current yield of 4.6% on 10-year gilts is highly comparable, and may look tempting for investors who are concerned about savings rates falling.
However, this is only half the story, as gilts can have added appeal for higher-rate taxpayers or anyone who has maxed out their tax-free Isa allowance.
Tax on gains from gilts
While the income you get from a bond’s coupon payments counts as taxable income, any capital uplift you make from buying and selling government gilts or holding them to maturity is free from capital gains tax.
This makes gilts with low coupon payments and a high yield attractive for investors as it minimises income tax while maximising tax-free capital gain. Plus you can still use your personal savings allowance against a bond’s coupon payments.
As many of the gilts on the market today were issued when rates were near zero, most of their yield comes from capital uplift when they mature, making them a useful tool to pay less tax on investments held outside of an Isa.
As newly issued gilts will have a much better interest rate, old gilts on the market are less appealing and are therefore cheaper to buy.
- Find out more: best cash Isas 2025
How can you purchase government bonds?
Gilts can be purchased directly from the UK government’s Debt Management Office, but most are traded on the open market where their price can fluctuate.
The easiest way to buy existing gilts is either through a stockbroker or via an investment platform.
You can also invest in bonds through an investment fund, however investing directly offers those who hold them until maturity a very predictable return.
This is because investors know the current price they can buy at and the amount they will eventually be repaid at a known date in the future, as well as the interest payments they will receive in between.
- Find out more: best investment platforms
