UK Bond markets: What they are and why they matter Live and let yield

Bond markets might not always grab as many headlines as the stock market, but they do quietly impact everyone.

When governments, companies, or households borrow, the interest rates they pay can often trace back to bond market movements. If gilt yields rise, the cost of financing increases and vice versa. This can impact everything from mortgages to large scale corporate projects. Governments face the same challenge, rising yields mean more of the national budget is swallowed by interest payments, leaving less available for public services.

But bond markets don’t just determine borrowing costs, they can also influence where investors put their money. Because government bond yields act as a benchmark for other asset returns, a sharp rise in yields can draw investors away from equities.[2] Unsurprisingly, this shift in sentiment can impact stock markets and portfolio strategies.

On a bigger scale, the bond market serves as both a funding channel and a mood barometer for the economy. Governments use bonds to finance long term projects and manage fiscal deficits without immediate tax rises, while corporate bonds often fuel business growth and innovation. At the same time, movements in yields can send signals about inflation expectations and investor confidence, as well as the broader economic outlook.

The influence of bond markets can also extend into retirement planning. Insurers often use proceeds from annuity purchases to invest in long-dated gilts, which means higher gilt yields can directly translate into better annuity rates, and thus higher guaranteed incomes for retirees.[3]

A brief history of UK bond markets

To understand where the UK bond market stands today, it helps to look at how we got here. Over the past decade, a lot has happened in the UK bond market.

Quantitative easing (QE)

The story really kicks off in the wake of the 2008 financial crisis. As the global economy teetered on the edge of a deeper recession, central banks, including the Bank of England (BoE), turned to Quantitative Easing (QE). Under QE, the BoE started buying government bonds (initially buying £75 billion in assets by 2009) to lower interest rates and encourage lending.[4] The aim was to pump money into the economy by increasing the money supply, effectively encouraging borrowing and stimulating investment.

By 2012, the BoE had bought over £375 billion of assets and injected hundreds of billions of pounds into the economy through bond-buying programs.[5] As the years went on, QE became a permanent fixture in the financial playbook, especially as the recovery from the crisis proved slow and fragile. The result was bond yields plummeted, and the market became flooded with government debt. But it did help provide a lifeline to the UK economy in the face of stagnant growth and low inflation.[6]

Quantitative tightening

Fast forward to the post-pandemic world. As the economy began to recover from the shock of COVID-19, inflation started to rear its head. To combat rising prices, the Bank of England shifted gears. Quantitative Tightening (QT) became the new strategy in 2022.[7] This involved the BoE gradually unwinding the bond-buying program by selling off some of the government bonds it had previously accumulated. The goal was to reduce the money supply and inflation while also allowing interest rates to return to more ‘normal’ levels. The BoE aims for an inflation rate of 2%.[8] In total, the Bank of England bought £895bn of bonds with most being UK government bonds (£875bn) and the remaining being UK corporate bonds (£20bn).[9]

While QT has been a key part of the BoE’s recent policy moves, it’s not without its challenges. The process of unwinding the vast holdings of gilts has put upward pressure on yields, which in turn can increase borrowing costs for the government and consumers. With the UK’s public debt already at historically high levels, selling off gilts can risk destabilising the bond market if it’s not carefully managed.[10]

The state of UK bonds today

In recent months, calls have intensified for the Bank of England to rethink its strategy of selling off large amounts of government debt. Even Nigel Farage earlier in September called for the BoE to halt its bond-selling programme.[11]

Chancellor Rachel Reeves’s 2025 Autumn Budget put the challenges of public finances front and centre. While tax rises and fiscal tightening helped shore up the government’s position, UK public borrowing still remains relatively high. In November, for example, monthly borrowing exceeded expectations, even though it was the lowest November deficit since 2021, and total borrowing for the year-to-date sat among the highest on record.[12]

Over the past few months, prominent fund managers have been urging the Bank of England to pause or substantially slow its gilt sales. Their argument is that selling large volumes of government bonds into an already rocky market has pushed yields higher and inadvertently added tens of billions of pounds to the government’s debt servicing costs.[13]

In saying this, recently, the Bank of England made a change in September 2025. The Monetary Policy Committee, has decided to slow the pace of its gilt reduction target, reducing its planned QT from around £100 billion a year to about £70 billion between October 2025 and September 2026.[14]

This doesn’t necessarily mean the Bank is winding back QT entirely, it will still reduce its bond holdings, but it’s potentially a small nod to market conditions. The shift wasn’t just cosmetic with part of the adjustment involving skewing sales toward short- and medium-dated gilts and scaling back the number of long-dated bonds actively sold.¹³

If you would like to learn more about UK bonds from our investment team, you can read an article by them here: UK bond yields are surging : Here’s why it matters more than you think | Saltus.

What all this means for gilts and the economy

Taken together, these moves reflect a bond market that’s sensitive to both fiscal policy and monetary mechanics:

Borrowing needs and budget signals influence investor confidence and demand for gilts. Continued high borrowing, even amid fiscal tightening, keeps markets on alert.

Looking ahead, bond markets will likely remain a barometer for confidence in the UK’s fiscal path, and for whether policymakers can keep the delicate balance between controlling inflation, managing debt costs, and maintaining orderly market functioning.

Some argue that the market’s volatility, especially in the face of rising debt levels, could create a vicious cycle, where high yields increase borrowing costs, making it even harder for the government to balance its books. Others warn that the rapid pace of QT could harm the recovery by restricting liquidity just when it’s needed most.

As a result, the conversation around UK bonds has become seemingly more urgent. Should the BoE continue selling gilts at this pace, or is it time to pause and reassess? As the bond market remains a key indicator of broader economic health, the answers to these questions will likely shape the UK’s fiscal policy over the coming years.