You could be forgiven for thinking gilt yields are something only bond traders need to worry about. In reality, they influence everything from mortgage rates to business investment and the government’s room to spend. This week, we look at why yields are rising, what that means for the economy and businesses.

Gilt yields are rising in 2026

A government bond yield is the return investors demand to lend to the government. In the UK, government bonds are known as gilts – supposedly because they were once printed on gilt-edged paper. The yield on a 10-year gilt has risen from about 4.5% at the start of this year to a little over 5% now, its highest level since the financial crisis, despite the Bank of England (BoE) not increasing interest rates this year. The yield on 30-year gilts has risen to almost 6%, its highest since 1998.

It’s tempting to blame this on UK-specific factors. But government bond yields are surging across the world, especially in America. That doesn’t mean the UK is off the hook. We still have to pay a higher interest rate than similar countries, suggesting investors see us as a riskier place for their cash. That reflects a combination of political risk, low growth and sticky inflation. But with yields rising everywhere, it is clearly not all the UK’s fault.

So, what is driving the increase in gilt yields?

The energy shock and the threat of rising inflation are important factors. Inflation expectations matter because inflation erodes the purchasing power of a bond’s fixed payments. When investors believe inflation could remain elevated, they demand a higher yield as compensation.

But there is much more to it than that, especially for longer-dated bonds. Governments are still spending as if interest rates were near zero and their economies were in crisis. The budget deficit in the UK is likely to be close to 4% of GDP this year and close to 6% in the US. At the same time, this borrowing is becoming increasingly hard to finance. The UK will spend about 3.7% of national income just to pay the interest on its debt. In other words, we are borrowing more to help cover our interest bill. It is a similar story in the US and elsewhere. That increases the risk of public debt rising further, prompting global investors to demand a higher risk premium.

There is also something of a credibility issue. Inflation has been above target in the UK and US for much of the past five years, raising questions about whether it will return sustainably to 2%. Meanwhile, various governments have not followed through on promises to bring deficits down. Lenders therefore have to factor the prospect of higher inflation and greater bond issuance into the price they are willing to pay.

The elephant in the room is the rise of economic populism. There is a logic to populism, whether it comes from the right or the left. Both versions tend to favour expansionary fiscal policy – tax cuts, higher spending or both – tolerate higher inflation and resist efforts by central banks to restore price stability. If such policies continue for long enough without a course correction, the risks of financial and currency instability increase. Global investors understand where such policies can lead.

Alongside the huge supply of government bonds, the private sector is also starting to borrow more. AI firms are expected to borrow about $500bn this year to build data centres – for comparison, the UK government will borrow about $160bn. That is increasing competition for capital and pushing yields higher.

None of these factors look temporary, and so bond yields are rising to compensate.

Why you should care about rising gilt yields

There are two broad reasons why we should all care about the cost of government debt.

First, the more the government has to spend on debt interest, the less it has to spend on other things, such as benefits, health or defence – or the more it has to raise in taxes, leaving everyone with less to spend elsewhere. That creates a form of fiscal drag, which weighs on growth. Higher gilt yields will therefore create a headache for the government as it tries to support the economy while sticking to its fiscal rules.

Second, the cost of government borrowing helps set borrowing costs across much of the economy. Since the start of 2025, the Bank of England has cut interest rates by one percentage point, but the cost of a five-year mortgage has risen, as has the cost of a fixed-rate business loan. After all, why lend to a riskier company or household for less than you can earn by lending to the government, which is far less likely to default?

So, the higher gilt yields go, the more expensive your mortgage and the more expensive it is for a business to borrow to invest. The natural consequence is less consumer spending, less business investment and slower economic growth.

The upshot is that concerns about the sustainability of government debt are no longer just a problem for finance ministries or bond traders. Higher long-term yields raise the cost of capital across the economy, affecting mortgages, business loans and investment decisions. Even if the Bank of England resumes cutting interest rates next year, intense competition for investors’ money means borrowing costs are likely to remain higher than businesses and households became used to in the decade before the pandemic.

For businesses, the message is simple: do not wait for lower Bank Rate to assume finance will become cheap again. Investment cases will need to clear a higher hurdle, refinancing will require earlier planning and cash generation will matter more. Rising gilt yields may sound like a distant market story, but they will increasingly shape the choices made in boardrooms, households and government.

There is growing evidence that UK productivity growth may finally be starting to pick up after years of little more than stagnation. Since the financial crisis, annual growth in output per hour has averaged just 0.4%, compared with 2.1% a year in the preceding 20 years.

One caveat is that the picture depends on how you slice the data. The traditional productivity measure uses the Labour Force Survey (LFS), which, despite the ONS’s best efforts, has been distorted by low response rates since the pandemic. The ONS currently recommends its alternative measure, which primarily uses HMRC payrolls data to estimate employment, as the best guide to recent changes in productivity. On that measure, productivity growth has averaged 1.8% since Q4 2024, compared with 0.1% on the LFS measure over the same period.

This is genuinely positive news, as productivity ultimately determines real wages and, hence, living standards. It also boosts tax receipts for the government without the need for punitive tax hikes. There are a couple of possible reasons for resumption in productivity growth. It could be that the big increase in employment costs has caused firms to shed their most unproductive labour and squeeze more from existing employees.

Second, there could be some nascent evidence that firms are starting to benefit from using AI. For example, IT output has risen by almost 10% since the payroll tax increases were first announced, while employment has fallen by less than half that amount. However, it is really too early to be sure about anything AI – we’ll be doing more on this next week.

All told, early signs of an upswing in productivity mean that the UK may finally be breaking out of its low-productivity malaise, which, if sustained, should boost the potential growth rate of the UK economy, raise living standards and help improve the public finances.

Ofgem are set to announce another hike to energy price cap in October this week, as higher wholesale gas prices will more than offset the impact of Andy Burnham’s move to remove VAT from electricity bills.

That said, this will have relatively little impact on headline inflation. Ofgem’s price cap is based on typical use for dual-fuel households, but some households will only use electricity, where prices will probably fall, and in turn electricity has a much bigger weight within the CPI basket.

In any case, we still expect inflation to continue to rise over the coming months from 2.9% to a peak of 3.4% in November as food inflation rebounds due to higher fertiliser prices and any impact of El Nino while surveys point to a pickup in core goods inflation in the coming months.

Further ahead, the risks to utility bills lie to the upside. European natural gas storage is at its ten-year minimum which could prompt prices to surge in the coming months as countries scramble to ensure they have enough gas for the Winter. That would push household bills much higher in January, keeping inflation sticky in 2027.

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