The UK’s long-term government bond yields have risen substantially over the past few years. The 10- year gilt yield increased from around 1.5% in early 2022 to about 5.4% in mid-September 2026, with the 30-year yield following a similar trajectory. The rise is part of a broader global increase in (nominal) sovereign bond yields, initially driven by higher inflation and policy rates. However, a significant share of the rise in long-term gilt yields, especially more recently, illustrates a higher term premium, as suggested by the Bank of England and a recent IMF working paper.
Investors now require greater compensation to hold long-term UK government debt, thus borrowing costs have become more sensitive to global events and domestic fiscal policy developments. The BoE attributes about 200 basis points of the roughly 350 basis points rise in the 10-year gilt yield between February 2022 and June 2026 to the term premium, which moved from negative to positive territory over the period.
A Changing Investor Base and a Higher Price for Risk
The UK’s higher term premium reflects two reinforcing developments in the gilt market. First, the gilt investor base has become more price-sensitive. Demand from defined-benefit pension funds, historically stable buyers of long-term gilts, is declining as closed schemes mature and the pension system shifts toward defined-contribution schemes. The Office for Budget Responsibility expects this trend to continue over coming decades. At the same time, quantitative tightening or QT has increased the gilt supply that private investors must absorb. The BoE estimates that QT accounts for only 20 to 30 basis points of the rise in the 10-year gilt yield, as of the end July 2026. Together, weaker structural demand and greater supply require larger yield adjustments to attract buyers. The BoE’s September decision to pause active sales until April 2027 and retain its longest-dated holdings could potentially ease some pressure on gilts.
Second, IMF research suggests that the September 2022 gilt market disruption appears to have caused a lasting shift in gilt market behavior. The mini-budget episode heightened investors’ sensitivity to domestic policy uncertainty and global shocks. As a result, investors may now demand greater compensation during periods of heightened uncertainty or stress.
These developments amplify the effect of fiscal risks on long-term gilt yields through two distinct channels. A weaker fiscal outlook raises expectations of future borrowing and gilt supply, which may require higher yields to attract a more price-sensitive investor base. Separately, concerns about the government’s policy response to fiscal pressures can raise the risk premium investors demand. The government has recently shifted gilt issuance toward shorter maturities, reflecting the weaker structural demand for long-term gilts and lower near-term borrowing costs, increasing the refinancing risk. One mitigating factor is that the UK’s weighted average maturity remains long at about 14 years, the longest in the G7, slowing the pass-through of higher borrowing costs.
UK’s Higher Yields Challenge Fiscal Consolidation Path
The higher term premium makes the UK government’s fiscal consolidation path more challenging. Persistently elevated yields can raise debt interest costs and reduce fiscal flexibility. Higher borrowing costs are increasing the government’s debt servicing expenditure and eroding already narrow headroom against the fiscal rules. This leaves less room to deliver the planned fiscal consolidation while accommodating rising medium-term spending pressures, including those related to defense and the aging population.
The Burnham government has expressed its commitment to the fiscal rules and preserving a fiscal buffer. However, the higher term premium increases the risk to the fiscal outlook. With limited room to absorb further rises in borrowing costs or adverse OBR forecast revisions, the risks of fiscal slippage could materialize in the absence of offsetting policy measures. The upcoming Oct. 28 Autumn Budget will be key in assessing the extent to which the government can maintain a credible medium-term consolidation path amid these additional pressures.
