Falling Bond Yields Signal Renewed Market Confidence in UK Government

Recent trading activity suggests that market confidence in Sir Keir Starmer and Chancellor Rachel Reeves has strengthened, signalling an end to the elevated risk premium that has burdened UK government borrowing costs since the Labour victory last year. According to research from the Institute for Public Policy Research, a think tank with close links to the Labour Party, the yield on UK government bonds—commonly known as gilts—has declined by 0.2 percentage points more than equivalent bonds in both the United States and the eurozone since September.

Many analysts attribute this shift to Reeves’s public recommitment to fiscal discipline, particularly her pledge to fund daily public spending from tax revenues and to reduce the debt burden. This commitment was reiterated at the Labour Party conference and has since been well received by investors. Earlier in the year, the yield on ten year gilts exceeded the US equivalent by 1.1 percentage points and was 0.6 points above comparable eurozone bonds. Thirty year UK bonds displayed an even wider differential.

Such a risk premium generally reflects investor concerns about a country’s creditworthiness, inflation, and fiscal outlook. The IPPR noted that the premium’s persistence has been difficult to justify based on fundamentals, especially since the UK’s debt to GDP ratio, at around 100 per cent, remains below that of major counterparts like the United States, Italy, and Japan.

Bank of England Deputy Governor Dave Ramsden informed the Treasury select committee that bond market volatility was notably subdued ahead of the most recent budget announcement, compared with fiscal events managed by the previous government. Markets responded calmly and there were no concerns over financial stability, according to Bank officials, who also projected that the budget could bring inflation down by up to 0.5 percentage points from its current level of 3.6 per cent.

UK government borrowing costs have remained the highest in the G7, a situation intensified after market turmoil caused by events such as Liz Truss’s mini budget three years ago. Despite this, the outlook has improved since Labour’s fiscal plans have begun to unfold. Chancellor Reeves has increased fiscal headroom to £22 billion through a combination of deferred tax increases and spending restraint, with forecasts indicating government borrowing is set to be halved by 2029—potentially the sharpest fall among G7 nations.

Yet, despite these improvements, yields on UK debt remain comparatively high. The Office for Budget Responsibility estimates debt interest spending will surpass £100 billion annually over the coming five years. According to the IPPR, a complete removal of the UK’s risk premium could save taxpayers as much as £7 billion a year by 2029–30. The think tank’s analysts suggest that providing credible fiscal plans can underpin robust investor confidence, and they advocate for the Bank of England to reconsider its policies on quantitative tightening, which have modestly increased gilt yields. Weakening demand from final salary pension schemes has also contributed to elevated borrowing costs.

The prevailing narrative is one of cautious optimism; market participants and policymakers are watching whether current fiscal discipline can deliver lasting savings and stability for both the government and taxpayers.