Spike in gilt yields: why fund managers see opportunity

The beginning of 2025 has been marked by a significant sell-off in both UK and global government bonds, leading to a dramatic rise in bond yields. With 30-year UK government bond (gilt) yields reaching their highest levels since 1998 and 10-year yields matching similar heights last seen during the 2008 global financial crisis, the financial landscape is undergoing a seismic shift.

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Bond prices and yields move inversely, so when prices drop, yields increase, and vice versa. Yields represent the effective return on investment for bondholders, and a spike in yields typically reflects investor concerns about economic fundamentals. Over the past year alone, 30-year and 10-year gilt yields have surged by over one percentage point, an unusually large move for government bonds.

This development is contributing to a higher cost of borrowing for the UK government while amplifying fiscal and monetary challenges. Adding to the complexity, the British pound has weakened significantly, recently hitting its lowest level against the US dollar since November 2023.

The recent spike in UK government bond yields can be attributed to several factors. On the international front, the surge in US government bond yields created upward pressure on global government bond yields, including UK gilts.

Domestically, the UK government’s plan to increase taxes and government borrowing and expand spending to boost growth has been faced with skepticism. Additionally, broader issues surrounding the UK's fiscal deficit, sticky inflation, growing government debt, and stagnating economic growth has dampened demand for gilts.

Within this challenging landscape, fund managers with significant exposure to UK government bonds have been adapting their strategies to mitigate risks and seize opportunities amid rising yields. Below are some key perspectives:

Allianz Gilt Yield

Allianz entered 2025 with a duration overweight of one year to gilts. Following the January spike in global yields, they currently assess entry levels to add to their duration exposure. They note that rising US rates have been a major contributor to the broader global bond sell-off, and they anticipate that a more dovish Bank of England position in the coming months could support gilt performance.

Royal London UK Government Bond

Royal London increased its gilt duration exposure during late 2024 as Gilt yields rose and currently has an overweight of around one year. With 30-year maturity gilts reaching 5.4%, the team sees compelling value at the longer end of the curve for long-term investors, while shorter-maturity bonds are expected to benefit from more interest rate cuts than the market is currently pricing for 2025.

M&G Global Macro Bond

M&G entered 2025 with a duration overweight in sterling duration and remain optimistic about gilt valuations amid significant economic headwinds. The team warn of a possible negative feedback loop between fiscal policy constraints and economic weakness. They expect the Bank of England to eventually ease monetary policy to avoid a recession, leading to lower gilt yields.

Jupiter Strategic Bond

Jupiter retains 20-25% of its duration in UK gilts, particularly focusing on bonds with maturities of 10 years or longer. Given the recent repricing in the bond market, the outlook on gilts remains cautiously optimistic, and no significant positioning changes are planned in the short term.

Artemis Strategic Bond

Artemis Strategic Bond has adopted a more defensive stance, holding just 0.2 years in UK gilts. The team proactively reduced exposure at the beginning of the year in anticipation of first-quarter supply increases. They expect increased government spending to move gilt yields higher as funding and servicing requirements grow.

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The broader sell-off in global bond markets, coupled with internal fiscal concerns, exemplifies the vulnerability of the UK economy amid elevated borrowing costs and inflationary pressures. Yield movements reflect both cautious investor sentiment and uncertainties regarding how policymakers will strike a balance between fiscal discipline and economic growth.

Fund managers largely agree that the current market challenge offers opportunities for active investors to position favorably as conditions evolve. Whether the Bank of England will adopt a more accommodative stance depends on inflation’s trajectory and underlying economic performance. Meanwhile, fiscal discipline will be paramount in avoiding further market volatility.

With economic growth expected to slow due to restrictive monetary policy, the coming months are likely to test both fiscal and monetary strategies. Investors will be closely watching the government’s adherence to fiscal rules and the Bank of England’s outlook to guide their decisions in an increasingly uncertain environment. For now, while risks prevail, some fund managers see the potential for rates - and gilt yields - to significantly decline if economic conditions worsen.

Evangelia Gkeka is senior manager research analyst at Morningstar.