Bond investors can earn more income today than they could for much of the past two decades.
On 13 October 2026, the UK 10-year gilt offered a yield of around 5.4%, having reached 5.46% during the month, its highest level since 2007. The yield on the 10-year US Treasury recently reached its highest level since 2002.
A gilt is a bond issued by the UK Government. By buying one, an investor is effectively lending money to the Government in return for interest and the repayment of their original investment at maturity, provided the bond is held until then.
Higher yields mean more potential income, but they also reflect greater uncertainty. With conflict in the Middle East dominating headlines, some investors may be tempted to step back. We believe the change in bond markets deserves a closer look.
Why have bond yields risen?
Bond prices and yields move in opposite directions. When yields rise, the market value of existing bonds generally falls. Several factors have recently pushed yields higher.
Higher energy prices
Conflict in the Middle East has driven up oil and refined fuel prices. This can feed through into household bills and the wider cost of goods and services. UK inflation rose to 3.1% in August, and the Bank of England expects it to climb further over the coming quarters. When inflation rises, investors tend to demand higher bond yields to compensate for the risk that inflation will reduce the spending power of their future income.
Changing interest-rate expectations
A year ago, financial markets expected interest rates to fall. They now expect further increases. Bank Rate is 3.75%, but three of the nine members of the Bank of England’s Monetary Policy Committee voted to increase it in September. Markets also expect a rise in November. In the US, firmer inflation has led to discussion about a possible Federal Reserve rate increase. These are market expectations, not certainties. They can change quickly as new economic information becomes available.
Pressure on public finances
Higher defence spending needs to be funded. The Chancellor's Budget on 28 October provided further detail on the Government's plans for public spending and defence investment. The Budget confirmed that higher defence spending remains a priority, while government borrowing costs continue to be closely monitored by investors.
If the Government borrows more, it generally needs to issue more gilts. A greater supply of bonds can push prices down and yields up, particularly if investor demand does not increase at the same pace.
Less support from the Bank of England
The Bank of England is reducing its gilt holdings by around £46 billion a year. For much of the period following the global financial crisis, central bank purchases supported demand for government bonds and helped keep yields low. As those holdings are reduced, private investors must absorb more of the available supply.
Why consider bonds now?
More potential income
The yield available when a bond is purchased is an important influence on its potential long-term return. At around 5.4%, the 10-year gilt yield is higher than the latest UK inflation rate of 3.1%. This suggests the potential for a positive return after inflation if these conditions persist. However, inflation and bond prices will change over time. A yield above today’s inflation rate does not guarantee a positive return after inflation, particularly if the bond is sold before maturity or inflation rises further.
Higher income can provide a cushion
When a bond provides more income, that income can help offset some decline in its market value. An illustrative estimate suggests that yields could rise by around 0.8 percentage points before the income on certain gilts was offset by a fall in their price. The precise outcome would depend on the bond’s maturity and sensitivity to interest-rate changes, as well as how long it was held. The reverse can also apply. If economic growth weakens or pressure on energy prices eases, bond yields could fall. Because yields and prices move in opposite directions, that could produce a capital gain in addition to the income received.
Bonds can help diversify a portfolio
Bonds can behave differently from shares, helping to spread risk within a portfolio. During this month’s fall in share markets, investors bought gilts and pushed their yields to a three-week low. This showed how government bonds can sometimes benefit when investors become more cautious and seek assets perceived as safer. The relationship is not always straightforward. Geopolitical tensions can increase demand for government bonds, but they can also push up energy prices and inflation, causing bond yields to rise. Diversification can help manage risk, but it cannot prevent losses.
Waiting has a cost too
Investors may prefer to wait until the outlook becomes clearer. However, by then, today’s yields may no longer be available. Cash rates could fall once the current period of interest-rate increases ends. Individual bonds can provide a known level of income if they are held to maturity, subject to the issuer continuing to meet its payments. Returns from bond funds are less certain because their holdings and market values change over time.
Why might active management matter?
This remains an uncertain market. Inflation, interest rates, government borrowing and geopolitical developments can all affect different bonds in different ways. Many passive bond funds follow indices that give the largest weight to governments or companies with the most debt outstanding. This can result in greater exposure to the biggest borrowers, rather than those offering the most attractive balance between risk and potential return.
An active manager can make deliberate choices in several areas:
- Managing interest-rate sensitivity: Shorter-dated bonds can offer much of today’s available yield while generally being less sensitive to further rate increases than longer-dated bonds.
- Responding to events: The portfolio can be adjusted around developments such as the Budget or central bank meetings, although there is no guarantee that these decisions will improve returns.
- Considering inflation protection: Index-linked gilts can be included if there is concern that higher energy prices will feed into wages and other prices. Their payments are linked to inflation, but their market value can still fall.
- Selecting corporate bonds: An active manager can favour companies with stronger finances and avoid those considered more vulnerable to higher energy costs or an economic slowdown.
Active management may offer greater flexibility, but it normally costs more than passive investing and does not guarantee better performance.
A more attractive starting point, with risks attached
Geopolitical risk is real, and bond yields could rise further in the short term. If they do, the market value of existing bonds is likely to fall. However, investors are now being offered more potential income for taking that risk, with yields at levels not seen for nearly two decades. For some long-term investors, a gradual allocation to high-quality bonds may therefore be worth considering as part of a diversified portfolio. Whether bonds are appropriate, and how much to invest, will depend on your goals, time horizon, attitude to risk and wider financial circumstances. If you are unsure, please speak to a financial adviser.
Sources:
Trading Economics: UK 10-year gilt yield
Trading Economics: UK interest rate
Advisor Perspectives: Treasury yields snapshot, 9 October 2026
CNBC: 10-year Treasury yield backs off from 24-year high
Bank of England: nominal par gilt yields and Bank Rate
Important Information:
This document is for information purposes only and does not constitute personal financial advice. If you are unsure about whether a particular course of action is suitable for you, we recommend that you seek independent financial advice.
The value of investments and the income from them can fall as well as rise, and you may get back less than you originally invested. Past performance is not a reliable indicator of future performance. Tax treatment depends on individual circumstances and may be subject to change in the future. Tax and estate planning outcomes are not guaranteed.
Titan Wealth Planning Ltd is authorised and regulated by the Financial Conduct Authority (FCA reference number: 574458). Registered address: 101 Wigmore Street, London, W1U 1QU, United Kingdom.
