The short-term outlook on gilts is particularly unpredictable as we approach Trump’s inauguration (Image: Getty)
‘s election could , an expert has warned.
In the days before and just after Trump’s win in November gilt yields, in both the UK and the US, rose.
Two days before Trump was elected Reuters reported that the five-year gilt yield rose 11 basis points on the day to an annual peak of 4.449%.
Gilt yields have continued to rise and Reuters reported that 30-year gilts are now paying out 5.198% compared to 4.747%.
Some experts have blamed this rise on UK Chancellor Rachel Reeves’ October budget.
But one expert said the reason for the latest rise is further away from Westminister, as the world’s financial centres brace themselves for ‘s first few weeks as US President.
Richard Carter, head of fixed interest at Quilter Cheviot said: “Gilt yields have surged sharply in recent weeks, which is bad news for the government as it stokes fears about the state of public finances.
“This spike can be partly attributed to ‘s victory in the US presidential election, as his policies on tax and immigration are expected to drive inflation, leading to rising yields in the US and, consequently, in the UK as well.”
The rise in yields means UK long-term borrowing costs have hit a 27-year high but gilt yields can fluctuate.
Gilt yields also influence swap rates, which are a money market mechanism used by lenders to decide how much they can afford to lend at fixed rates for.
Other factors may also influence borrowing, for example bond prices fell, pushing up yields, after the Chancellor Rachel Reeves delivered her first budget in October last year.
Her higher than expected government spending and a jump in borrowing which surpassed the £40bn she outlined in tax increases sent the five-year gilt up to peak of 4.449%.
A rise in government borrowing may also mean the Bank of England holds off on any more cuts to the base rate.
The UK government is having to pay more interest on its borrowing as it attempts to lure investors to buy bonds, which are also known as gilts.
Bonds are issued by the UK government to raise money to fund infrastructure projects and spending on public services.
Reuters reported that Britain’s latest auction of 30-year government debt received the lowest demand since December 2023.
Yields on shorter-term debt also were up this morning, including two-year, five-year and 10-year gilts, Reuters reports.
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Carter added: “The Bank of England remains cautious about slashing too aggressively, and the tepid demand from investors at the latest gilt sale underscores the uncertainty in the market. The short-term outlook is particularly unpredictable as we approach Trump’s inauguration, adding to the volatility.
“Despite this turbulence, gilt yields still present an attractive opportunity for long-term investors. Currently, they are well above expected inflation levels, making them a viable option for those looking to secure returns in a sluggish economy that might prompt further rate cuts by the Bank of England.
“For investors with a lower risk appetite, short-dated gilts still offer a promising avenue and are less sensitive to market fluctuations.”