May was the month the bond market delivered its verdict on Britain. After a heavy defeat for the governing party in the local elections, the cost of long-term government borrowing climbed to its highest level since 1998. The headlines focused on Westminster. The more important story was about money. What it costs the country to borrow shapes what the pound in your pocket is worth. This article explains what happened, how the gilt market works and why it matters to every British saver.
What happened
On 7 May Labour suffered one of its worst ever local election results, losing control of 35 councils and close to 1,500 councillors. Within days more than 80 Labour MPs were calling for the Prime Minister to step down. On 14 May the Health Secretary resigned. A Labour MP also stood down so that Andy Burnham could seek a route back to Parliament through a by-election.
Markets reacted quickly. On 12 May the yield on 30-year gilts rose above 5.8%, the highest since 1998. The 10-year yield passed 5.1%, the highest since 2008. Richard Carter of Quilter Cheviot said the market was "pricing in a higher risk premium". In plain terms, lenders wanted extra reward for the extra uncertainty.
How the gilt market works
Gilts are the bonds the British government sells to borrow money. A buyer lends the government a sum today. In return the government pays a fixed amount of interest each year and repays the original sum on a set date, which may be decades away. Pension funds, insurers, banks and overseas buyers all hold gilts.
Once issued, gilts are traded every day. When buyers grow nervous, they pay less for existing gilts. Because the interest on each gilt is fixed, a lower price means a higher yield for anyone who buys it. That yield is the clearest daily signal of what lenders think of Britain's finances. When it rises sharply, the market is asking for more reward to keep lending.
Why gilt yields matter to savers
A gilt yield is the interest rate the government must pay to borrow. When it rises, the cost of servicing Britain's debt rises with it. The country already spends more than £100 billion a year on debt interest. In its March 2025 forecast the Office for Budget Responsibility expected debt interest to reach £111.2 billion in 2025-26, about 8.3% of all public spending. That is close to the post-war high of £111.6 billion set in 2022-23.
Every extra point on gilt yields adds billions more over time, money that cannot be spent on anything else. The effects reach households directly too, because fixed mortgage rates and annuity rates tend to follow the same market.
Higher yields are the market's way of asking for compensation. Lenders want more interest because, put simply, they fear two things: more borrowing ahead and a pound that buys less by the time they are repaid. That second fear is the one that matters most to savers.
What it means at home
For most households the gilt market feels remote. Its effects are not. When gilt yields rise, lenders tend to reprice fixed rate mortgages, so anyone coming to the end of a fixed deal may face higher payments. Annuity rates usually improve, which can help those buying a retirement income. Savings rates can rise too, although they rarely keep pace with what the government itself pays to borrow.
The bigger effect is slower. A government paying more in interest has less to spend on everything else, from the NHS to the state pension. Over time it must choose between higher taxes, lower spending or more borrowing. Each of those choices lands on households in one way or another, which is why a quiet move in the bond market deserves attention.
We have been here before
Last September we wrote that Britain's borrowing costs had hit a 27-year high. Eight months on, the record has been broken again. Before that, in New Year, Old Problem, we looked at the long decline in the pound's buying power as debts and deficits grew. Each step in this story has followed the same pattern. Spending pledges grow. Borrowing rises. The bond market eventually demands a higher price.
The sharpest recent example came in September 2022. The government's mini-budget announced tax cuts estimated at around £45 billion a year. Over the next three days the 30-year gilt yield jumped by 1.2 percentage points. The Bank of England had to step in, setting aside up to £65 billion to buy gilts. In the end it bought about £19.3 billion between 28 September and 14 October to steady the market.
The episode showed how quickly confidence can break. It also showed that when it does, the central bank is expected to step in, often by creating money to buy the very debt the market no longer wants.
In June 2024 we wrote that gold outlasts every government. The past month made the point once more. Political leaders come and go. The debt they leave behind stays with the currency.
The view from Washington
Britain is not alone. American inflation rose to 3.8% in April, the fastest pace since 2023, driven by higher energy costs after the conflict with Iran. On 22 May Kevin Warsh was sworn in as chair of the Federal Reserve after the narrowest Senate confirmation vote for the post in history. Markets now expect US rates to stay high for longer. Some forecasters expect a rise before the year is out.
Gold eased by around 2% in May for its third monthly fall in a row. Even so, it remains far higher than it was a year ago. A firmer outlook for interest rates has weighed on the price since March. That is the short-term picture. The longer-term picture is governments on both sides of the Atlantic paying more to borrow, with no clear plan to borrow less.
What gold offers in this setting
Gold is the one major asset that is no one's debt. It does not depend on a government's ability to pay its bills or a central bank's ability to hold its nerve. It has no yield to rise and no credit rating to lose. When confidence in paper money weakens, gold is where that confidence tends to go.
That matters because the usual escape route for a heavily indebted government is a slow one. Debt is rarely paid down in full. More often it shrinks in real terms as inflation erodes the value of the pounds it is measured in. Lenders know this, which is why they ask for higher yields. Savers holding cash face the same risk without being paid a premium for it.
For British savers there is a further advantage. UK legal tender gold coins such as the Britannia and the Sovereign are exempt from Capital Gains Tax for UK residents. Gold bars do not share this advantage. 999.9 fine gold, owned outright, sits entirely outside the gilt market and the politics that move it.
Speak to a specialist
If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.
Sources
- Professional Pensions, UK gilt yields rise amid growing leadership crisis
- Business Standard, US consumer inflation rises 3.8% in April
- Reuters via Business Standard, gold set for third straight monthly fall
- Office for Budget Responsibility, Debt interest (central government net)
- EFG International, UK mini-budget sparks gilt market mayhem
This article is for information only. The value of gold can go down as well as up.