As a former equity analyst with over two decades of market experience, I’ve always viewed bond markets as the purest barometer of investor sentiment. Today, UK gilts are flashing a stark warning: rising yields, stubborn inflation expectations, and fiscal uncertainty have put Britain in a uniquely precarious position.

With 10-year gilt yields at 4.63% and 30-year gilts at 5.47%, investors are demanding a higher risk premium to hold UK government debt. This isn’t just about global interest rate trends—it reflects deep-seated concerns about the UK’s economic trajectory, inflation credibility, and fiscal sustainability.

De-anchored Inflation Expectations and Fiscal Pressures

Pantheon Macroeconomics warns that UK household inflation expectations are becoming “de-anchored,” with five-year-ahead expectations at 4.3%, well above historical norms. Sticky wage growth—currently running at 5.1% year-on-year—and regulatory cost pressures make it increasingly difficult for the Bank of England to hit its 2% inflation target. Inflation is expected to re-accelerate to 3.4% by Q4 2025, limiting the MPC’s scope for rate cuts.

The Labour government’s tax-raising agenda and higher public spending have further unsettled markets. Debt servicing costs are climbing as bonds are issued at elevated yields, and the gilt curve reflects a structural demand for higher risk premia.

Consumers’ Confidence and Retail Trends

Consumer sentiment remains under pressure. GfK’s composite confidence index fell to -19 in July (from -18 in June) as households worry about inflation and October Budget tax hikes. Google search data for “tax hikes” is currently three times higher than in July 2024, highlighting public unease. While personal financial outlooks held steady at +2, views on the economy fell to -29. Notably, “major purchase intentions” rose to -15, signalling some resilience in spending, but the “good time to save” balance surged to +34—the highest since 2007—indicating ongoing caution.

Retail sales data provide a slightly brighter picture. Sales volumes rose 0.9% month-on-month in June, following a steep (revised) 2.8% drop in May, with annual growth accelerating to 1.7%. Online sales increased by 1.7%, and department store sales rose by 2.1%. Retail volumes are averaging 0.2% monthly growth this year, supported by rising real wages and reduced precautionary savings. June’s retail figures are set to add 0.05pp to monthly GDP, keeping Q2 growth on track at 0.2% quarter-on-quarter.

PMI: Enough for the MPC to Cut, But Revisions Matter

The latest flash S&P Global/CIPS composite PMI fell to 51.0 in July (from 52.0 in June), below consensus (51.8), signalling subdued momentum. The services PMI dropped to 51.2, while manufacturing rose to 48.2, hinting at modest domestic demand strength. Sentiment was hit by fears of autumn tax hikes and a soft jobs outlook, with the employment index slipping to 45.1—the weakest since February.

Encouragingly, business optimism about future output has improved, and late survey responses have been more upbeat in recent months, suggesting that the final PMI data may be revised upward. Pantheon notes that the PMI still supports a rate cut in August, but this cut is expected to be the last of the year and the final one for this cycle.

Manufacturing Recovery After Tariff Turbulence

Manufacturing activity shows signs of improvement. The CBI Industrial Trends Survey total orders balance rose to -30 in July (from -33 in June), and once seasonally adjusted, this translates to a rise from -40 to -33. This aligns with the Manufacturing PMI’s output index hitting 50.0 in July, the highest since October 2024. Easing geopolitical tensions and lower economic policy uncertainty have likely supported this recovery, and the data suggest that the worst of the post-tariff slowdown is over.

Although export orders remain weak—dropping to -28 amid ongoing EU-US tariff tensions—domestic demand and hiring intentions are improving. The CBI’s quarterly survey shows that overall business optimism has risen to -27 (from -33 in April), with forward-looking employment balances also increasing. All told, manufacturing output is expected to experience a gradual recovery through the second half of 2025.

Global Context: The UK Premium

The UK’s 30-year gilt yield (5.47%) trades ~0.6 percentage points above the US 30-year Treasury (4.9%), highlighting market scepticism. While rising yields are a global theme, the US is buoyed by GDP growth of 2.2% in 2025 and fiscal clarity. In contrast, Eurozone nations, such as France and Italy, continue to attract capital at lower borrowing costs.

Risks, Opportunities, and Sectoral Implications

• Fixed-income appeal: Elevated gilt yields offer substantial relative value for income-seeking investors.
• Automotive and clean tech: Capital-intensive sectors face higher financing costs, complicating expansion plans.
• Venture capital: The higher risk-free rate tightens funding conditions, compressing valuations.
• Sterling and exports: With GBP/USD around 1.35, exporters benefit from a currency tailwind, though higher import costs feed back into inflation.

Conclusion: Rebuilding Trust

The combination of rising yields, de-anchored inflation expectations, sliding consumer confidence, mixed PMI data, and recovering manufacturing highlights the UK’s fragile yet complex economic backdrop. Fiscal credibility and targeted reforms will be crucial to restoring trust and narrowing the gilt premium.

For investors and businesses, navigating this environment means recognising both the risks and the opportunities in a landscape defined by higher rates, elevated inflation, and shifting consumer sentiment.

Have a great week!