10-year bond rate

Relative to the pre-crash era, rates recorded in the post-financial crisis era dropped substantially and have remained comparatively low as the government and the BoE moved to support economic growth and made key policy decisions with the intention to supress government debt. The 10-year bond rate has been affected by a number of factors; long-term yields plummeted as the BoE dropped the official bank rate, and demand increased as there was less competition from short-term interest rates, with investors seeking the safety of government bonds. The rate was also pressured by the BoE, which created artificial demand by conducting mass quantitative easing (QE); also known as large-scale asset purchases, QE is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity (i.e., the introduction of new money into the money supply).

In 2016-17, the average 10-year bond yield contracted by 0.65 percentage points (pps), due in part to the BoE's strategy of cutting the official bank rate combined with a bond-buying program implemented from August 2016 following the Brexit vote. In 2017-18, the bond yield rose marginally – by 0.05 pps – albeit any exponential increase was held back by then-prevalent uncertainty regarding the UK's post-Brexit operating environment and dull economic growth; 10-year gilt bonds became less attractive due to potential restrictions to the UK's single market access and concerns regarding the UK's ability to form a comprehensive withdrawal agreement prior to the EU-UK Trade and Cooperation Agreement eventually being ratified. Nevertheless, the slight upturn in yields was the result of an anticipated increase in UK interest rates. In November 2017, the BoE inevitably opted to raise the official bank rate from 0.25% to 0.5% - the first increase since July 2007 – and on 2 August 2018, the BoE Monetary Policy Committee (MPC) voted to increase interest rates to their highest level since 4 March 2009 - from 0.5% to 0.75% - citing concerns that the lowest unemployment rate since the mid-1970s risked re-igniting wage pressures.

In 2018-19, the bond rate increased again on average over the year, by 0.12pps; however, in 2019-20, the bond yield reverted into decline, contracting by 0.63pps after being heavily influenced by the immediate economic consequences of the Covid-19 (coronavirus) outbreak. The pandemic disrupted supply chains, currency markets, stock markets, commodity markets, consumer demand and business activity. As yields move inversely to a bond's price, and in response to the global coronavirus outbreak, investors rushed to buy one of the safest assets in the world – bond yields - which are favoured at times of economic stress. Furthermore, as influential global central banks, including the US Federal Reserve (Fed), slashed interest rates in March 2020 – the Fed cut its base rate by 0.5pps on 3 March 2020, the first rate cut by the Fed in between scheduled meetings since the 2008 financial crisis – traders across the globe were spooked. As the Fed cut the rate again on 15 March 2020, taking the Fed's overnight borrowing rate for banks back to near-zero, now-cautious investors and traders sent bond yields down across the globe.

Another facilitator for the significant decline in the 10-year Government Treasury Bond yield since the latter stages of Q1 2020, and through the crux of the pandemic, was the BoE MPC opting to slash the official bank rate. In response to the pandemic and consequent economic disruption, the BoE announced an emergency cut to the official bank rate from 0.75% to 0.25% on 11 March 2020, so as to stimulate market activity. Eight days later, the BoE again slashed the official bank rate from 0.25% to 0.1% - the lowest rate on record – and held it at such a level for an extended period. With regards to the bond rate, it contracted by a further 0.39pps in 2020-21. However, as the economy has reopened and as market activity has resumed post-lockdown, inflationary pressures have mounted. Compounded by supply-side factors – the Russia-Ukraine conflict has made already severe supply chain disruption, by way of coronavirus restrictions, even more extensive – inflation, led by surging energy commodity and goods prices, has risen exponentially, hitting 7% in March 2022; the BoE expects inflation to break the 10% barrier in 2022. The BoE, fearing a recession and hinting at potential stagflation, has opted to hike the base interest rate on 16 December 2021 (0.25%), 3 February 2022 (0.5%), 17 March 2022 (0.75%) and 5 May 2022 (1%), in an effort to combat rising inflation. With expectations of significantly high inflation for an extended period, investors demand a greater return be paid on the bonds they purchase in order to compensate for surging prices. Accordingly, the average 10-year bond yield increased by 0.61pps in 2021-22, and 1.99pps in 2022-23. In 2023-24, a 0.82pps rise is forecast to reach 3.8%.