UK bond yields soar to multi-decade highs: Is it a new ‘Truss moment’?

Yields on UK government bonds have soared to levels not seen in decades, with 10-year gilts reaching 4.90% on Thursday – the highest since July 2008 – and 30-year yields climbing to 5.40%, a peak last recorded in August 1998. The pound also tumbled to a 14-month low against the dollar, falling below $1.23. 

While some draw parallels to the market panic during Liz Truss’s short-lived premiership, analysts remain divided on whether this episode signals a broader crisis or a passing storm.

In a note shared Thursday, BBVA analyst Alejandro Cuadrado said: “Capital flows are flowing out of the UK, pushing bond yields higher and the pound lower. The current situation could become a ‘mini Truss moment’ if fiscal concerns persist.”

What is driving the UK bond market sell-off?

The UK bond market is under pressure from a mix of global and domestic factors. 

Rising inflation, increased fiscal spending, and a global bond sell-off have all contributed to higher yields. 

The 30-year gilt, in particular, has been hit hard, reflecting investor concerns about long-term inflationary risks and the sustainability of the UK’s public finances.

Additionally, the British pound has come under significant pressure, falling below $1.23 to hit a 14-month low against the dollar. 

ING Group analyst Chris Turner said: “The gilt market has proved to be the Achilles’ heel for long sterling positions. The recent widening of gilt spreads prompted investors to cut back on overweight sterling trades.”

The global backdrop also plays a key role. 

Across the Atlantic, US Treasury yields have risen sharply as markets digest the incoming administration of Donald Trump. His pledges to impose sweeping tariffs and implement tax cuts have raised fears of inflationary pressures and surging deficits.

The situation in the UK is also tied to developments in the United States, where Treasury yields have surged as markets digest the incoming administration of Donald Trump. 

His pledges to raise universal tariffs – up to 60% for China and 10–20% for other countries – and implement sweeping tax cuts have stoked fears of inflationary pressures and surging deficits. 

The 30-year US Treasury yield, at 4.95%, is hovering near its highest levels since 2007.

Is this another ‘Truss moment’?

The rise in UK gilt yields has inevitably drawn comparisons to the “Truss moment” of September 2022, when unfunded tax cuts during Liz Truss’s brief premiership triggered a sharp sell-off in gilts and forced the Bank of England (BoE) to intervene.

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However, this time, the situation differs in several key respects.

While the rapid rise in yields has raised alarms, analysts believe the market stress is less acute. 

“Unlike the Truss turmoil, today’s move is more gradual, which should prevent a spiral higher in gilt yields”, said Turner. 

“Demand from foreign buyers remains strong, reducing the risk of a repeat of 2022’s liquidity crunch among pension funds.”

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That said, some underlying factors remain similar. Sticky inflation and government spending continue to weigh on investor sentiment, while Fitch Ratings recently flagged “significant uncertainty” in the UK housing market, adding to market jitters.

Global bond stress: Why is the eurozone holding up?

While the UK and US bond markets have been hit hard, the eurozone has largely avoided similar turmoil. 

German bund yields have risen but remain within their two-year range, while Italian and Spanish bond yields have seen little movement.

French yields, however, have climbed to their highest levels since October 2023, reflecting some pressure.  

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For now, the eurozone remains insulated from global bond market tensions, thanks in part to more subdued inflationary pressures and expectations of slower economic growth in 2025 which could give the European Central Bank a leeway to cut interest rates further. 

“The rebound in headline inflation was driven largely by energy, with both the lower base from last year and recent euro weakness contributing to higher petrol prices”, said Bill Diviney, an analyst at ABN Amro. However, Diviney added: “We expect headline inflation to resume its fall from February as energy base effects fade, with the 2% target expected to be reached sustainably by April.”

ABN Amro anticipates further rate cuts from the European Central Bank (ECB), including a 25-basis-point cut at the Governing Council’s 30 January meeting, which would lower the deposit rate to 2.75%.

What’s next for Sterling and gilt yields?

The pound remains vulnerable as investors reassess its trajectory, with ING analysts pointing to a strong dollar driven by the Trump administration’s economic agenda. While GBP/USD could dip further to $1.2250, a fall to $1.20 seems less likely.

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The BoE, meanwhile, faces a challenging balancing act. Markets are pricing in three 25-basis-point rate cuts by year-end, with December’s SONIA forward suggesting a terminal rate of 4%. Sticky inflation, however, complicates the case for monetary easing.

Looking ahead, analysts see limited room for additional increases in gilt yields. 

“Sticky inflation, government spending, and higher US rates will keep upward pressure on UK rates”, said Turner. “However, the underlying fundamentals suggest that steep sell-offs on sovereign risk are unlikely.”