Leading Indicators | A rocky beginning to 2025: Bond markets face volatility, from the UK to global
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GLOBAL BOND YIELDS SURGE
The first two weeks of 2025 have brought significant turbulence to global financial markets, marked by a sharp rise in government bond yields. In the UK, the 10-year gilt yield has surged by 29 basis points since the start of the year, reaching 4.85% - its highest level since 2008. Meanwhile, 30-year gilt yields have soared to their highest point since 1998.
This sharp rise in bond yields is driven by a combination of global and domestic factors, with developments in the US playing a key role. Persistent inflation concerns have reignited fears across markets, as inflation proves stickier than expected. The UK’s annual CPI rate climbed to 2.6% in November, its highest level in eight months. Adding to the pressures are renewed geopolitical and trade tensions, including tariff threats from Donald Trump, which have contributed to heightened uncertainty. These factors have led markets to adopt a more hawkish view of near-term monetary policy.
The rise in bond yields is not confined to the UK; but part of a broader global trend. UK gilt yields are broadly moving in line with US treasuries, with the 10-year American Treasury bond reaching almost 5%. Japanese bond yields are also on the rise and German bunds have risen to 2.6%, up from nearly 2% in December.
2025: A HAWKISH YEAR AHEAD FOR MONETARY POLICY?
Markets have scaled back expectations for the Bank of England (BoE) to cut interest rates in 2025, driven by concerns that Chancellor Rachel Reeves’ policies could exacerbate inflationary pressures. Current money market pricing reflects the expectation of just two quarter-point rate cuts this year, while economists are slightly more optimistic, predicting reductions of 75–100 basis points, depending on the forecasting house. However, forecasters are frequently revising their views, making it difficult to grasp overall sentiment. As recently as October, markets were pricing in as many as five rate cuts for 2025.
At the same time, the pound has fallen below $1.22 against the dollar for the first time since November 2023. This depreciation enhances the UK’s relative attractiveness in terms of pricing, particularly for US-based investors. The weaker pound presents an opportunity for these investors to reallocate capital into UK commercial real estate (CRE), leveraging the currency advantage to capitalise on pricing opportunities.
PRESSURE ON THE BoE?
The cautious start to 2025 stands in sharp contrast to the optimism that characterised early 2024, when markets were predicting six rate cuts, only for policymakers to deliver just two.
Despite the UK’s current period of stagnant growth, the underlying economic fundamentals suggest a strong case for the BoE to cut interest rates at its upcoming February monetary policy meeting. Signs of a cooling economy are becoming increasingly evident. Key indicators, such as easing labour market tightness and subdued consumer spending, support this outlook. Consensus forecasts point to a modest UK GDP growth of +0.2% m-m in November, while consumer sentiment shows signs of improvement. The latest GfK Consumer Confidence Index rose to -17 in December 2024, marking its second consecutive monthly gain.
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