What does the chart show?
The UK 20-year real gilt yield, the real return on long-dated index-linked government debt relative to RPI inflation, has risen from around -2.5% during the pandemic era to roughly +2.4% today, near its highest sustained level in more than two decades.
Short-term rates are heavily influenced by the Bank of England, while long-dated real yields reflect expectations for future real rates, alongside bond supply, investor demand and the premium investors require for long-term debt. They're a useful guide to where real rates may settle, though not a pure measure of the economy's "neutral" rate.
The key development over the past year has not been further sharp increases, but persistence. Despite shifting Bank of England rate expectations, real yields have stayed close to their post-2022 highs. This appears consistent with markets assigning a lower probability to a return to the ultra-low real-rate environment of the 2010s, though higher term premia (due to gilt market supply/demand dynamics) and other factors are also contributing.
Why this is important
Higher real yields have implications across almost every asset class. For bond investors, they mean more attractive starting returns. For equity investors, a higher discount rate reduces the present value of future earnings, pressuring valuations, particularly for growth-oriented companies. For pension schemes and other long-term investors, higher real yields can reduce the present value of long-dated liabilities, though the net impact depends on how assets and liabilities are structured.
More broadly, the question is shifting from "when will rates fall?" to "where will they ultimately settle?" If the 2010s prove to have been the exception rather than the norm, the equilibrium level of rates could be materially higher than many investors became accustomed to.
Bottom line: The real story may not be "higher for longer," but "higher for longer than expected." If today's elevated real yields reflect a lasting shift rather than a temporary dislocation, assumptions built around the exceptionally low yields of the 2010s may need revisiting across asset valuations, pension liabilities and portfolio construction.
Markets balanced resilient activity and strong technology investment against a renewed rise in sovereign yields and volatile energy prices. Diversification remained important as regional growth, inflation and policy risks continued to diverge.
-
Business surveys pointed to rapid expansion but also stronger input-cost pressures and supply bottlenecks, reinforcing concerns that inflation could remain persistent.
-
Treasury yields rose sharply as resilient data, hawkish Federal Reserve commentary and weak government debt auctions strengthened expectations of further policy tightening.
-
Large technology and semiconductor companies remained supported by enthusiasm for artificial intelligence, although delays to a major data-centre project highlighted financing, power and execution risks.
-
Improving prospects for US-Iran negotiations reduced some energy-supply fears late in the week, but oil-price volatility continued to influence inflation expectations and bond markets.
-
September business surveys showed the private sector still expanding, although softer services activity and intensifying price pressures underlined the economy’s difficult growth-inflation trade-off.
-
Consumer confidence weakened as households anticipated higher energy costs, while retail surveys indicated falling sales and a sharp reduction in orders placed with suppliers
-
Fiscal scrutiny remained elevated after international institutions called for stronger control of spending and debt, keeping gilt-market sensitivity to the October Budget firmly in focus.
-
Bank of England officials signalled that persistent energy costs could make rate rises more likely, even though evidence of broader second-round inflation effects remained limited.
-
German political uncertainty increased after poor state-election results for the governing CDU, although the immediate implications for federal policy and large listed companies appeared limited.
-
Germany’s economy was expected to lose momentum in the third quarter as transport disruption, subdued consumption and weaker export support offset earlier resilience.
-
Euro-area policymakers warned that renewed oil and gas pressures could keep inflation above target for longer, sustaining the possibility of additional monetary tightening.
-
European equities were pulled between higher bond yields and changing energy prices, with growth-sensitive sectors under pressure while defensives and selected financials proved more resilient.
-
The People’s Bank of China kept its main lending rate unchanged, signalling continued reliance on targeted support rather than a broad new easing cycle.
-
The US-China summit produced few concrete outcomes beyond a two-month extension of the trade truce, leaving technology restrictions, rare-earth supplies and strategic competition unresolved.
-
China’s exposure to disrupted Middle East energy flows remained a global concern, although alternative suppliers, inventories and domestic demand management continued to cushion the immediate impact.
-
Japanese equities retained support from corporate governance reform, domestic policy and investment linked to artificial intelligence and advanced manufacturing, despite pressure from higher global yields.
