Inside the US and UK Yield ‘Gap’

Commentators we follow continued handwringing over UK public finances this week, with His Majesty’s Treasury engaging in its apparent newfound summer pastime: floating tax hike proposals to see how the public and markets take them.^[i] As ever, we think this is part and parcel of markets’ pre-pricing changes in advance, helping sap surprise power by the time tax tweaks become official. We think it is also quite speculative, rendering it rather pointless to dissect proposals in detail here at the moment. But we have seen one topic in much of the coverage we follow that we think is worth exploring. Several articles have noted UK Gilts’ higher yields versus comparable maturity US Treasurys, arguing this implies UK debt is extra fragile, with risks extending to the economy and stocks.^[ii] But in our view, a quick look at market history should help refute this.

Exhibit 1 shows 10-year US and UK government yields in this millennium. If we were to look back only five years or so, then it might appear market fundamentals had changed, making UK debt suddenly riskier. Gilt yields went from comfortably below US Treasurys to frequently over. But stretch back the full 25 years, and we think a different picture emerges: one where Gilts and Treasurys generally move together, trading leadership irregularly to no ill effect. The stretch where UK yields lingered well below the US’s appears to be a long aberration, not a norm we suddenly deviated from.

Exhibit 1: A Longer Look at US and UK Yields

Source: FactSet, as of 13/8/2025. 10-year benchmark US and UK government bond yields, monthly, 31/1/2000 – 31/7/2025.

We see a simple explanation for that multiyear stretch where US Treasurys fetched far higher yields, and in our view, it has nothing to do with debt, deficits or fiscal policy. Rather, we think the culprit was monetary policy and how the US Federal Reserve (Fed) and Bank of England (BoE) approached quantitative easing (QE, monetary policy institutions’ purchasing of government debt securities and other long-term assets from banks to reduce long-term interest rates) as the 2010s matured.

The Fed started winding down new QE asset purchases in December 2013, tapering them to zero by October 2014.^[iii] From there, it was solely reinvesting the proceeds of maturing bonds, not adding to its balance sheet.^[iv] In December 2015, it began hiking short-term interest rates.^[v] A few rate hikes later, in October 2017, the Fed started letting some maturing bonds roll off its balance sheet—a process known as quantitative tightening (QT).^[vi] That process continued through August 2019, alongside a couple more rate hikes.^[vii] Based on our research, all these moves, all else equal, promoted higher long-term yields than there would otherwise have been. We find bond markets move on supply and demand. When the Fed stopped buying as much, it removed some demand from the marketplace, promoting higher yields (bond yields move opposite bond prices).

Meanwhile, the BoE actually cut its benchmark short-term interest rate just after 2016’s Brexit vote, keeping it at 0.25% until November 2017.^[viii] Another hike followed in August 2018, but at just 0.75%, the bank rate was well below the fed-funds target range.^[ix] Meanwhile, the BoE chose not to shrink its balance sheet.^[x] So whilst US monetary policy promoted higher long-term yields, Bank of England policy promoted lower Gilt yields. Not only was there relatively less upward pressure from the short end of the yield curve (which would come from policy rate hikes), but the BoE was still reinvesting proceeds of all maturing Gilts, which our research finds generally tugs down yields.^[xi]

Then COVID and lockdowns happened, with both monetary policy institutions restarting QE and bringing rates back near zero.^[xii] That erased a lot of US Treasurys’ yield premium over UK Gilts.^[xiii] In February 2022, the UK ceased reinvesting maturing Gilts, starting its QT programme.^[xiv] The Fed started doing the same in June 2022, and the BoE started selling Gilts outright that September.^[xv] And what else happened in September? Gilt yields finished the month above US Treasury yields for the first time in years.^[xvi]

Thus, it appears to us that markets are simply adapting to monetary policy changes and expectations. Both institutions have cut rates, though the Fed has been on hold lately.^[xvii] Both have continued shrinking their balance sheets, and both have discussed stopping that process.^[xviii] Inflation expectations in the UK seem a little higher, due largely to energy price caps’ distortions and lingering speculation over employer National Insurance and wage hikes.^[xix] As inflation expectations ebb and flow in both countries, we think yields probably do, too, continuing their longer-term back and forth.^[xx]

So we don’t think higher Gilt yields this year are a sign of trouble. Just normal volatility amidst a return to normal monetary policy, in our view. Recency bias may make it seem like this time is different, but we find market history can provide investors with valuable context.