Five things to know about gilts ahead of the Autumn Budget

Luke Hickmore, Investment Director – Fixed Income, at Aberdeen Investments, breaks down what the gilt market is and its importance ahead of Wednesday's Budget announcement.

1.What are gilts?

Gilts are bonds issued by the UK government to raise money. Investors lend money to the government in exchange for regular interest payments, known as coupons, and the return of the money when the bond reaches maturity.

Gilts are considered “risk-free” in the sense that the UK government is deemed highly unlikely to default on the bonds, but their prices and yields can fluctuate significantly.

2. Gilt market shapes politics and policy

When the UK government borrows money, it relies on gilt investors to keep funding its spending plans. If confidence in the Government's discipline around spending starts to falter, the consequences can be significant.

While market reactions have influenced policy shifts — such as during the Barings crisis (1890), Sterling crises in the 1930s and the 1976 IMF bailout, as well as the ERM exit in 1992 — these episodes typically led to policy reversals or Cabinet reshuffles, rather than immediate resignations of a Prime Minister or Chancellor solely due to gilt market moves.

However, following the mini-Budget in September 2022, the announcement of unfunded tax cuts triggered a sharp sell-off in gilts, sending yields significantly higher and dramatically increasing government borrowing costs. Within weeks, both the Prime Minister and Chancellor were out of office.

Higher gilt yields mean higher borrowing costs for the government. If investors believe spending plans are unsustainable, they can demand a higher return, or in rare cases refuse to buy gilts altogether. In such a scenario, the government’s ability to fund day-to-day spending can be compromised, forcing emergency measures and policy reversals.

This dynamic explains why every Autumn Budget is scrutinised not just by voters but by gilt investors.

3. Gilts underpin almost everything in UK economy

Gilt yields represent the “risk-free rate” in the UK. This rate is typically used to price loans, mortgages, and even companies on the stock market. For example, mortgage lenders set a rate based partly on gilt yields when setting fixed rates. If gilt yields rise, mortgage rates will likely follow, making home ownership more expensive. Similarly, pension funds and insurers use gilt yields to calculate liabilities and returns, influencing retirement incomes.

The impact also goes beyond personal finance. Businesses planning long-term projects often compare expected returns against gilt yields. If gilts offer a risk-free return of 5% per year for example, then businesses are unlikely take on the uncertainty of a major infrastructure investment for the same return. This dynamic can slow economic growth because money flows into gilts instead of productive projects that benefit the UK economy.

Gilts are not only important for investors — they shape the financial environment in which every UK household and business operates.

4. New gilts issued are getting shorter in maturity

One of the most significant shifts in the UK government bond market is the move toward shorter maturities at the time of borrowing. Historically, gilts were often issued with terms of 20–30 years, providing long-term stability for both the government and investors. Today, the average maturity for new bonds has fallen to around 4–5 years.

Shorter maturities mean the government must refinance its debt more frequently. Instead of locking in borrowing costs for decades, the Treasury now faces regular auctions to roll over existing debt and fund new deficits. This increases refinancing risk: if market conditions deteriorate or investor appetite weakens, the government could face significantly higher borrowing costs.

5. Gilt market will remain critical for foreseeable future

The UK’s reliance on gilts isn’t going away anytime soon. Government debt now stands at roughly 100% of GDP — the highest level outside wartime — and fiscal deficits remain substantial. To fund this gap, the Government needs to keep issuing gilts month after month. That means the gilt market will continue to shape economic policy and political decisions for years to come.

Gilt yields are closely watched because, as a country, the UK spends more on borrowing costs than on education for example. Every time yields move higher, the UK’s borrowing costs go higher, which means money has to be re-allocated from paying for vital services to paying for borrowing costs.

A good Budget means yields can move lower – which is good news for every UK taxpayer.  

For investors, gilts will remain a key reference point for interest rates, mortgage costs, and investment returns.