With the UK struggling to grow its way out of debt, controlling public spending is critical to breaking the cycle of money printing, unsustainable debt, and rising inflation. The upcoming budget will reveal whether the current government is serious about addressing this challenge.

However, borrowing conditions are worse now than in 2022. During the gilts crisis, 10-year yields peaked at 4.4%; recently, they hit 4.7%, close to a 17-year high. Higher yields increase the government’s interest burden, and a sudden spike from this elevated base could have severe consequences. Bloomberg notes that this puts “renewed pressure on Prime Minister Keir Starmer’s government to rein in its fiscal stance.” Yet, like Truss’s government, which sought tax cuts, Starmer’s administration resists spending cuts, despite a growing welfare bill and a £62 billion budget deficit.

Bond yields are within historical norms but high compared to the low-interest era of 2008-2023. This shift has left policymakers struggling to adapt. Pension funds, once major buyers of gilts, are retreating, replaced by insurers favouring corporate bonds, raising the risk of a bond sell-off. Jagjit Chadha, an economics professor at the University of Cambridge, warns of a potential crisis akin to the 1976 Sterling crisis, when the UK sought a massive IMF bailout. He notes, “We haven’t controlled debt very well... By failing to address this critical issue, we leave ourselves vulnerable to a random shock.”

The UK is not alone. France’s 10-year bond yields now exceed those of Greece and Spain, signalling similar fiscal strain. Germany’s Chancellor Friedrich Merz has admitted its welfare model is unsustainable. High energy prices, driven by poor planning and climate policies, exacerbate these issues, undermining growth. As Bertolt Brecht said, “Food is the first thing, morals follow on.”

External factors, like Trump’s tariffs, add to inflationary pressures, while increased public spending risks fuelling price rises in a stagflationary environment. The UK’s focus on public sector funding, including military spending and public sector pay rises, contrasts with the private sector’s need for relief to drive growth. The UK’s 10-year bond yield (4.76% on 30 September 2025) is the highest among seven major economies, despite a relatively low debt-to-GDP ratio of 97%. The US, with a 4.15% yield and a 120% debt-to-GDP ratio, benefits from the dollar’s reserve currency status but faces its own fiscal challenges.

The US is taking steps to address unsustainable debt, such as stablecoin legislation to boost domestic demand for treasuries. In contrast, the UK’s reluctance to curb spending highlights a stark policy difference. Meanwhile, Trump’s push to curb the Federal Reserve’s independence could signal a broader trend, potentially impacting global bond markets. Central banks’ aggressive policies, like Quantitative Easing, have fuelled asset bubbles and wealth inequality, and their influence may wane as governments seek greater control.

The US dollar and treasuries are losing their “safe-haven” status, as seen in recent market sell-offs. This raises concerns for other government bonds, including UK gilts. Bonds remain a cornerstone of modern finance, held by banks and pension funds for stability and income. However, their declining value could spark the next financial crisis. Fixed income no longer guarantees safety, requiring active management to navigate rising rates and credit risks.

Alternative assets are gaining traction. Gold, reclassified as a tier-one asset, is seeing strong central bank buying. Bitcoin, the Swiss Franc, and commodities like oil and gas are also viable options, especially amid geopolitical tensions and rising energy demands in a tech-driven world.

The UK’s bond market faces serious challenges, with high yields, rising debt, and policy missteps increasing vulnerability to a crisis. Without fiscal consolidation, the risk of a shock grows. As global economic dynamics shift, bonds require careful scrutiny, and alternative assets may offer new opportunities. The UK’s ability to adapt will determine whether it can navigate these turbulent times or face a repeat of past crises.

Ian McKnight, Senior Adviser - Cartwright Pension Trusts