Autumn Budget: Five things that have changed for gilts since the last Budget

A year on from the last Budget the backdrop has changed considerably: yields are higher, a new Prime Minister and Chancellor are in place, and bond markets around the world are under pressure. That matters well beyond the trading floor, because gilt yields feed through to mortgage rates, pension planning, business investment and the cost of government borrowing.

Gilts are still the UK's financial anchor, but that anchor is sitting a lot higher than it was a year ago. Much of the move is global as oil, conflict in the Middle East and rising US yields are pushing borrowing costs up everywhere. The UK simply has less room to absorb it than most.

This Budget is about credibility. The Chancellor has said fiscal discipline will be at its core, and the gilt market will hold him to that. If he sticks to the plan, gilt yields may have room to fall. However, any surprises may mean that the market (and a costly bill) could arrive quickly.

With gilts back in focus ahead of the Autumn Budget, we examine five developments shaping the market.

1. Global yields at multi-decade highs

The 10-year gilt yield stood at around 5.4% at the end of September, roughly half a percentage point higher than a year earlier. At the start of the month the 30-year yield climbed to almost 6%, its highest level since 1998, as bond markets sold off around the world.

Unlike the mini-Budget in 2022, this is not a UK-only event. Renewed conflict in the Middle East has pushed oil prices sharply higher and revived fears about inflation, and the US Federal Reserve has raised interest rates. US 10-year Treasury yields are close to two-decade highs and German yields reached their highest level since 2011. Markets that were expecting interest rate cuts earlier this year are now pricing rises instead.

The Bank of England has already acted to ease the strain. In September it held interest rates at 3.75% and paused its sales of gilts back to the market, including sales of long-dated gilts, taking some pressure off the longer end of the curve.

2. A new Chancellor faces the gilt market's reality check

This will be John Healey's first Budget as Chancellor, and the first major fiscal event for Andy Burnham's government, which has been in office for barely three months. Recent history shows the gilt market is the ultimate reality check for UK fiscal policy. After the September 2022 mini-Budget, unfunded tax cuts triggered a sharp sell-off, borrowing costs jumped and within weeks both the Prime Minister and the Chancellor had left office.

Speaking in Liverpool on 28 September, the Chancellor said fiscal discipline would be at the core of the Budget and that the Government would meet its fiscal rules. Gilt investors will judge whether the numbers on 28 October match that message.

3. The headroom is small vs how much yields move

At the Spring Statement in March, the Government had £23.6 billion of headroom against its fiscal rules. Higher gilt yields raise the cost of servicing the national debt, so the rise in yields since then has eaten into that buffer. Independent economists' estimates of what is left now range from around £8.5 billion to £16 billion.

That is not much room in a market that can move sharply in days. A useful rule of thumb is that every quarter-point rise in gilt yields takes around £2.5 billion to £4 billion off the Chancellor's headroom; the Office for Budget Responsibility's own estimate is that a sustained one percentage point rise in interest rates and gilt yields would add about £15 billion a year to borrowing.

In early September alone the 10-year yield rose by more than 0.2 percentage points in a single week. Borrowing is also running ahead of plan: in the first five months of the financial year the Government borrowed £77.3 billion, £8.1 billion more than the Office for Budget Responsibility had forecast.

“When your buffer is only a few billion pounds and the market can take a big bite out of it in a few weeks, there is no room for surprises,” says Luke. “The single most useful thing the Chancellor can do for gilt yields is to be boring.”

4. It is already reaching mortgages and household finances

Gilt yields are the UK's risk-free rate, and lenders look at them when pricing fixed-rate mortgages.

As markets swung from expecting rate cuts to pricing rate rises, quoted rates on 75% loan-to-value two- and five-year fixes rose by 0.82 and 0.61 percentage points respectively between February and July. Mortgage approvals have softened as affordability has come under renewed pressure.

There is another side to higher yields. Savers and investors can now lock in returns from government bonds that would have been unthinkable a few years ago, and gains on gilts are free of capital gains tax. With the annual cash ISA allowance for under-65s due to fall to £12,000, more people may look at gilts as part of their savings. As always, investors should consider their own circumstances and seek financial advice where appropriate.

5. What the gilt market wants to see 

The Government will need to keep borrowing heavily for years to come. The Debt Management Office plans to sell around £246 billion of gilts this financial year, and public sector net debt stands at 93.8% of GDP.

That borrowing is also getting shorter. Demand for long-dated gilts from traditional buyers, particularly defined benefit pension schemes, has faded, and the issuance plan has followed. This year, short-dated conventional gilts (up to seven years) make up 38.6% of planned sales, against just 9.1% for long-dated conventional gilts.

Over 2025 the average maturity of the conventional gilt stock slipped from 13.2 years to 12.9 years. The UK still has one of the longest debt maturity profiles in the G7, but borrowing shorter means refinancing more often, and more exposure if interest rates stay high.

For the gilt market, a good Budget has three ingredients: meeting the fiscal rules with a credible buffer, no unfunded giveaways, and a steady, predictable financing plan. Deliver that, and yields have room to move lower, which is good news for every UK taxpayer.