As the summer of 2025 nears its end, financial markets in the United Kingdom are once again in the spotlight, with investors and policymakers closely watching the interplay between government bond yields, business sentiment, and economic data. The latest developments have sparked a fresh round of debate: are rising UK Gilt yields a harbinger of fiscal trouble, or simply a sign of markets adjusting to a new monetary reality?
On Friday, August 15, the FTSE 100 opened higher, providing a glimmer of optimism after a mixed session in Asian markets and a flat day on Wall Street, according to The Independent. The rise came on the heels of news that Warren Buffett, the legendary outgoing CEO of Berkshire Hathaway, had made a splash with a new £1 billion purchase, underscoring continued international interest in UK assets despite recent volatility.
Yet the mood among business leaders and market analysts remains cautious. The latest UK economic data, released on August 14, showed a strong uptick in productivity for June 2025. However, this positive note was tempered by the fact that overall productivity for the spring quarter declined after a robust first three months of the year. As The Independent reported, hopes are now pinned on the recent interest rate cut—implemented in early August—to spur businesses into ramping up investment. But with the jobs market still uncertain, and firms citing persistent cost pressures, the path forward looks anything but straightforward.
One of the most hotly debated issues this week has been the so-called 'yield gap' between UK government bonds (Gilts) and US Treasurys. As of August 13, 2025, 10-year benchmark Gilt yields have risen above their US counterparts for the first time in years, according to data from FactSet cited by Fisher Investments UK. This development has prompted a flurry of commentary, with some analysts warning that higher yields may signal heightened fiscal risk for the UK. Headlines such as “Sky-High Bond Yields Are Crushing Reeves’s Dreams of a Building Boom” in The Telegraph have fanned these concerns, suggesting that elevated borrowing costs could stymie government plans for infrastructure investment and economic growth.
But is this narrative justified? A closer look at the historical data paints a more nuanced picture. Over the past 25 years, UK and US government bond yields have generally moved in tandem, occasionally trading leadership but rarely diverging for long. The period from the mid-2010s through the late 2010s, when UK Gilt yields consistently lagged behind US Treasurys, was itself an aberration, not the norm. Recent history, as Fisher Investments UK points out, suggests that the current reversal is neither unprecedented nor necessarily ominous.
The explanation, many experts argue, lies less in fiscal policy and more in the realm of monetary policy. Throughout the 2010s, the US Federal Reserve and the Bank of England charted markedly different courses. After the global financial crisis, both central banks engaged in quantitative easing (QE)—buying government securities to lower long-term interest rates and support economic recovery. But as the decade wore on, their strategies began to diverge. The Fed started unwinding its QE program in late 2013, tapering asset purchases to zero by October 2014, and began raising short-term rates in December 2015. By October 2017, the Fed had embarked on quantitative tightening (QT), allowing some maturing bonds to roll off its balance sheet, a process that continued through 2019.
In contrast, the Bank of England kept its foot on the monetary gas pedal. After the 2016 Brexit vote, the BoE cut its benchmark rate to 0.25% and held it there until late 2017, only nudging it up to 0.75% by August 2018—well below the Fed’s target range at the time. The BoE also chose not to shrink its balance sheet, instead reinvesting proceeds from maturing Gilts, which helped suppress long-term yields. As a result, UK bond yields remained lower than those in the US for much of the period.
That all changed with the onset of the COVID-19 pandemic. Both central banks slashed rates to near zero and resumed QE, effectively erasing the US yield premium. But as the world emerged from the pandemic, the monetary policy cycle shifted again. The Bank of England stopped reinvesting maturing Gilts and began its own QT program in February 2022, while the Fed followed suit in June 2022 and started outright bond sales in September of that year. By the end of September, Gilt yields had climbed above those of US Treasurys for the first time in years, a trend that has persisted into 2025.
What’s driving this latest shift? Inflation expectations, for one, have edged higher in the UK. According to Reuters, short-term inflation expectations rose in late July 2025, fueled by distortions from energy price caps and ongoing speculation about wage and National Insurance hikes. Businesses, meanwhile, are feeling the pinch from increased National Insurance Contributions, stubbornly high inflation, and mounting uncertainty over the autumn Budget. As The Independent notes, many firms say they are “simply hamstrung by cost pressures,” raising questions about their ability to invest and hire in the months ahead.
Despite these challenges, some analysts remain sanguine about the broader outlook. The recent rise in Gilt yields, they argue, is best understood as normal market volatility amid a return to pre-pandemic monetary policy settings, rather than a sign of looming fiscal crisis. “Recency bias may make it seem like this time is different, but we find market history can provide investors with valuable context,” wrote Fisher Investments UK. In other words, the current environment may feel unsettling, but it fits comfortably within the range of historical experience.
For investors, the message is clear: don’t let headlines about surging bond yields or fiscal doom obscure the bigger picture. Markets are constantly adapting to new information, whether it’s a central bank policy shift, a surprise economic data release, or a headline-grabbing investment from a global titan like Warren Buffett. And while the road ahead may be bumpy—especially with the jobs market in flux and cost pressures weighing on business sentiment—history suggests that such volatility is par for the course.
As the UK heads into the autumn, all eyes will be on the government’s next moves, the Bank of England’s policy stance, and the ever-evolving dance between inflation, interest rates, and growth. For now, though, the message from market history is one of perspective: today’s yield gap is less a warning siren than a reminder of just how dynamic—and resilient—financial markets can be.
