The slide in the pound and bond market turmoil – what it means for investing and saving

Markets have been riding the rumour rollercoaster over the inflationary impact of Trump’s tariff plans, leading to expectations that interest rates will have to stay higher for longer. This has caused nervousness among investors and led to falls in the pound and pushed up UK government borrowing costs sharply.

Although there’s been a global sell off in bonds, the UK gilt markets have been in the eye of the storm, partly because there was already wariness about UK debt levels.

There’s also some concern about stagflation, given that inflation has been creeping up and pay growth’s still hot, while the economy has been stagnating.

Here’s what it means for stock markets, interest rates and government spending.

This article isn’t personal advice. All investments can rise and fall in value, so you could get back less than you invest. If you’re not sure whether a course of action is right for you, ask for financial advice. Past performance is not a guide to the future.

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UK government bond (gilt) market turmoil – what investors need to know

Hal Cook

Senior Investment Analyst

Impact on the pound and the FTSE 100

Usually higher gilt yields support the pound but the dollar’s strength is flexing even more muscle, and concerns about UK growth are also weighing it down.

However, overall the UK is expected to be more insulated from fresh US tariffs, as the majority of trade with America is in services, which are set to be exempt from higher duties.

This might help the pound regain some ground, especially if bond markets calm further.

For now though, the weaker pound might provide a tailwind for the FTSE 100, given that multinational companies with overseas earnings (like mining stocks), benefit from the lower exchange rate. However, gains are being held back with domestically focused companies losing ground over concerns about the UK economic outlook.

Impact on tax and spending

The yield on some gilts rose above 4.8%, the highest since 2008, while longer term gilts yields hit their highest level since 1998. This puts Chancellor Rachel Reeves in a tricky position.

If the bond strop out continues, she risks falling foul of her fiscal rules – that day-to-day spending will be met by tax receipts and for debt to fall as a share of the economy. If the government has to pay higher interest on its debt, there’s less tax revenue for public services spending.

The Chancellor already had limited wiggle room, and the risk is that she might have to either cut spending or raise taxes.

Impact on interest rates

There are concerns that renewed inflationary pressures might limit the interest rate cuts by the Bank of England (BoE) this year.

However, this recent turmoil is unlikely to have an immediate impact on BoE decisions. Financial markets are still expecting around two interest rate cuts by the end of the year. If the government’s forced to increase taxes or cut spending, it could dampen down economic activity and make rate cuts more likely.

Impact on savings and mortgages

We are unlikely to see knee jerk moves in either the savings or mortgages markets. However, if interest rate cuts look set to be delayed further, more changes to offered rates might filter through.

In terms of savings, we’re starting to see it have an effect on longer term fixed rates, with rates fixed between two and five years increasing.

Mortgage rates have already crept up a little but there’s no need for prospective borrowers to panic. Very slightly higher rates have been brought in by some mortgage lenders, but as yet there’s nothing more widespread.

For more on cash savings, explore Active Savings.

Impact for bond investors

Given thatinvestment objectives should focus on the longer term, and shorter-term volatility is to be expected, there’s no reason to panic.

But it’s worth regularly reviewing investments and whether the split between shares and bonds still matches investment objectives.

Rebalancing is a good investment habit to get into. It forces investors to sell things that have done well and buy those that haven’t. It’s rare for something that has performed strongly to continue performing strongly, especially long term.

Investors should think about holding multi-asset investment funds as part of their portfolio to help spread their risk and ride out the ups and downs.