Inside the US and UK Yield ‘Gap’

The handwringing over UK public finances continued this week, with His Majesty’s Treasury engaging in its newfound summer pastime: floating tax hike proposals to see how the public and markets take them. As ever, we think this is part and parcel of markets’ pre-pricing changes in advance, sapping surprise power by the time tax tweaks become official. It is also quite speculative, rendering it rather pointless to dissect proposals in detail here at the moment. But we have seen a nugget in a lot of the coverage that 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. But a quick look at market history should put this to bed.

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 yes, it would 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 a different picture emerges: one where Gilts and Treasurys generally move together, leapfrogging irregularly to no ill effect. The stretch where UK yields lingered well below the US’s was a long aberration, not a norm we suddenly deviated from.

Exhibit 1: A Longer Look at US and UK Yields

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

We see a simple explanation for that multiyear stretch where US Treasurys fetched far higher yields, and it has nothing to do with debt, deficits or fiscal policy. Rather, the culprit was monetary policy and how the Federal Reserve and Bank of England (BoE) approached quantitative easing (QE) as the 2010s matured.

The Fed started winding down new QE asset purchases in December, “tapering” them to zero by October 2014. From there, it was solely reinvesting the proceeds of maturing bonds, not adding to its balance sheet. In December 2015, it began hiking rates. 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). That process continued through August 2019, alongside a couple more rate hikes. All these moves, all else equal, promoted higher long-term yields than there would otherwise have been.

Meanwhile, the BoE actually cut its benchmark interest rate just after 2016’s Brexit vote, keeping it at 0.25% until November 2017. Another hike followed in August 2018, but at just 0.75%, the bank rate was well below the fed-funds target range. Meanwhile, the BoE chose not to shrink its balance sheet. So while 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, but the BoE was still reinvesting proceeds of all maturing Gilts, which generally tugs down yields.

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

Seems pretty clear to us that markets are simply adapting to monetary policy changes and expectations. Both central banks have cut rates, though the Fed has been on hold lately. Both have continued shrinking their balance sheets, and both are jawboning about stopping that process. Inflation expectations in the UK are a little higher, due largely to energy price caps’ distortions and lingering fear over employer tax and wage hikes. As inflation expectations ebb and flow on both sides of the pond, yields probably do, too, continuing their longer-term leapfrog game.

So we don’t think higher UK Gilt yields this year are a sign of trouble. Just normal volatility amid a return to normal monetary policy. Recency bias may make it feel weird, but market history is your fact-packed antidote to that.