August 26, 2026

The Quiet Cost of Borrowing: What UK Government Bonds Are Telling Us

by Ewen Emmerson

in Insights Research

For the better part of fifteen years, a UK government bond was a wonderfully calm thing to own. Interest rates had settled at levels not seen for centuries, and when rates are low and falling, the price of an existing bond tends to rise. Investors who held gilts through that period, and many balanced portfolios did, enjoyed years of quiet, dependable gains from an asset that was never supposed to excite anyone. It was, in its own understated way, a very good decade for bonds.

The trouble is that the same arithmetic works just as forcefully in reverse. When rates rise, and particularly when they rise quickly, the price of an existing bond falls, and it can fall by a meaningful amount. That is precisely what has been happening. Rates have moved from those artificially low levels of the past decade towards considerably higher ones, and the journey has not been smooth. There have been several sharp, disorderly episodes along the way, most memorably in the autumn of 2022, when a mini-Budget triggered a rapid and unsettling move in the gilt market, but there have been further, smaller spikes of stress at various points since, both here and in other government bond markets around the world. For anyone holding gilts through this period, the experience has been the mirror image of the previous decade: a run of years in which the “safe” part of the portfolio has, at times, been anything but calm.

This matters for a second reason, beyond the simple fact of lower bond prices. One of the oldest and most trusted ideas in portfolio construction is that government bonds and shares tend to behave differently from one another. When bad news hits the economy and shares fall, government bonds have traditionally rallied, as investors seek safety and interest rates typically fall alongside growth expectations. This is the logic behind the classic mixed portfolio of shares and bonds; the two are meant to take turns cushioning each other. That relationship depends, however, on what is actually driving markets at a given moment. When the shock is a sharp move in interest rates themselves, rather than a fear about growth, bonds and shares can fall together rather than offsetting one another. A sudden rise in yields hits bond prices directly, and at the same time raises the rate used to value companies’ future profits, which can weigh on share prices too. Several of the more uncomfortable weeks investors have experienced recently have had exactly this character: both sides of a balanced portfolio moving in the same direction, for the same underlying reason, at the same time. It is a useful and slightly humbling reminder that diversification is not a fixed property of an asset; it depends on the nature of the storm.

Why has this happened at all? The obvious explanation is a domestic one, a new government, a new Chancellor, and a Budget to come in the autumn, and investor unease about the state of the public finances is a real part of the picture that we watch closely. But it is not the whole story, because a strikingly similar move has been under way in government bond markets across the developed world at the same time, in the United States and in Japan among others. A single country’s Budget cannot fully explain a shift happening almost everywhere at once. The more complete answer, one we have written about before in a different guise, is that the world has shifted from an era of abundant, cheap capital to one in which enormous, long-term investment, in energy infrastructure and in the physical build-out behind artificial intelligence among other things, is competing with governments for the same pool of savings. When the world’s largest borrowers are all drawing on the same well at once, the price of borrowing rises for everyone, whatever any single government has or has not done.

Having been through the sharper part of that adjustment, we recently added to our holdings of UK government bonds across client portfolios. We want to be precise about the reasoning. This was not a view on the outcome of the autumn Budget, and it was not an attempt to call the top of the move in yields; both would be a form of prediction we try to avoid. It reflected a judgement that, having absorbed a large part of the repricing already, government bonds were once again offering a genuinely useful level of income and a more balanced starting point within portfolios. We have also been mindful of where the greatest sensitivity to further stress still lies, and have favoured the shorter and middle part of the maturity range over the longest-dated bonds accordingly.

The broader lesson is one we return to often. A single, simple headline, “government borrowing costs are rising,” conceals a more layered story: a decade of artificial calm, a difficult and at times disorderly correction, a reminder that diversification behaves differently depending on the source of the shock, and a genuine, structural question about where the world’s capital is now being demanded. Understanding which parts of that story are doing the work, and by how much, is what allows a decision to be made with discipline rather than reaction. Perspective, not prediction, remains the approach that has served our clients best.

If you would like to discuss how government bonds sit within your own portfolio, please contact us to arrange a conversation with one of our advisers.