Executive Summary
Market Sentiment:
UK gilt yields climb as inflation proves sticky and policy uncertainty continues; global focus remains split between UK and US bond dynamics.
Key Theme:
Persistent inflation and elevated yields in the UK drive cautious asset allocation across markets. Policy paths remain contested, with spill overs to crypto, equities, and commodities.
Inflation Update
UK Inflation
July CPI: Rose to 3.8%, up from 3.6% in June and well above market expectations.
Drivers: Core and services inflation remain elevated, fuelled by strong wage growth (>5%), higher energy costs, and structural supply bottlenecks. Notably, food and transport contributed the most to July's headline figure.
Bank of England Outlook: The BoE now expects inflation to peak near 4% in September before slowing, but does not foresee a return to its 2% target before mid-2027. Service inflation and labour market tightness could keep price pressures elevated for several more quarters.
US Inflation
Current status: US inflation is lower than in the UK, but remains above the Fed’s 2% target, helping drive up Treasury yields alongside supply concerns.
Macro Implications:
Elevated inflation is keeping both UK and US central banks wary. Persistent price pressure limits the scope of rate cuts, keeps bond yields high, and maintains volatility in risk markets.
Recent Data & Market Performance
UK Gilt Yields
10-Year Gilt: Yield currently 4.77%, up 0.05% on the day and sharply higher versus 3.91% a year ago
20-Year Gilt: Trading at 5.45%, a marginal decrease from yesterday, but up more than 1% y/y
Yields remain below long-term UK averages (~6.12%) but have surged over the past year on persistent inflation and policy shifts
UK Inflation
July CPI: Rose unexpectedly to 3.8% from 3.6% in June, exceeding consensus forecasts and the previous Bank of England projection for the month
The BoE expects inflation could hit 4% in September, staying above its 2% target until mid-2027. Stubborn core and service inflation, wage growth (~5%), and energy price pass-through are the main contributors
Tight UK labour markets and higher minimum wages further complicate the inflation outlook.
US Treasury Yields
10-Year Treasury: Rose to 4.32% today, continuing its recent uptrend as US inflation and Fed policy debate intensify
US yields remain lower than UK’s, reflecting more contained inflation and a relatively more credible near-term path for rate cuts.
Policy Implications
UK: Monetary Policy
Bank of England: Recent 25bp rate cut passed on a razor-thin 5-4 vote. The MPC has signalled it will moderate the pace of easing, but sticky inflation and wage growth keep it on alert for renewed tightening if necessary
With inflation stubbornly above target, and labour market rigidity persisting, markets price in a slower and shallower UK rate-cut path versus the US and Eurozone.
Gilt yields reflect investors’ caution: strong demand for duration hedges and inflation-linked bonds, but higher rates for risk premia.
US: Monetary Policy
Fed Policy: US yields remain elevated (10y at 4.32%) as the market awaits clarity from Jackson Hole on the pace and scale of potential rate cuts.
US inflation is lower but not yet benign, and Treasury supply concerns contribute to ongoing yield pressure.
Cross-Market Implications
Equities
UK Stocks: Higher yields impact earnings multiples, with defensives and income stocks outperforming rate-sensitive growth names. A persistently high gilt yield keeps upward pressure on funding costs and tempers equity risk appetite.
US Stocks: S&P 500 and Nasdaq exposed to higher Treasury yields. Policy ambiguity may prompt short-term volatility, especially in tech and consumer cyclicals.
Commodities
Elevated yields, especially in the UK, strengthen sterling, weigh on gold, and soften the oil/dollar dynamic.
Commodities are range-bound as risk premium is offset by higher real interest rates; inflation hedge demand (e.g., gold) could pick up if policy error or stagflation fears rise.
Crypto Assets
Higher gilt and Treasury yields push institutional capital toward income assets, slowing allocations to crypto and reducing speculative activity.
If central banks signal rates “higher for longer,” expect continued volatility and consolidation in Bitcoin and ETH, supporting narrative of crypto as a “portfolio alternative” rather than a core yield play.
Scenarios and Outlook
Scenario | Gilt Yields | Policy Response | Impact on Equities | Commodities | Crypto |
|---|---|---|---|---|---|
Sticky Inflation/No Cuts | 4.8–5.0% | BoE stays cautious, no cuts | Defensive stocks +, growth - | Gold stable, energy soft | BTC/ETH range-bound, downside risk |
Inflation Peaks/Easing Resumes | 4.5–4.7% | BoE cautious cuts resume | Broad risk rally, tech outperforms | Gold up, oil up moderately | Crypto rallies, BTC recovers above $120k |
Policy Error/Surprise Hike | >5.0% | BoE forced to re-tighten | Sharp equity correction, high vol | Commodities surge (stagflation) | Crypto selloff, safe havens outperform |
Global Dovish Pivot | 4.2–4.4% | Fed/BoE signpost coordinated cuts | Global risk-on, EM outperforms | Inflation hedges, energy rally | Crypto spikes, altcoin cycle resumes |
Conclusion
The UK gilt market is at a pivotal point: persistently high inflation and robust yields force the BoE into cautious policy management, limiting aggressive easing. Cross-asset allocations favour income and defensives, with commodities and crypto awaiting firmer policy signals to break stale ranges. A move in either direction—policy error or dovish pivot—will rapidly reprice all major markets.
Key risks: Stagflation, policy errors, labour market surprises.
Key opportunities: Quality, income, tactical inflation hedges.
Watch for: Jackson Hole tone, next BoE policy statement, wage/inflation data, and crypto price stability around macro events.
Risk Disclaimer: This analysis reflects current market conditions as of August 20, 2025. Rapid changes in economic data, geopolitical developments, or central bank communications could materially alter the outlook. Diversification and appropriate risk management remain essential in the current environment. None of this is financial advice, Wizard Macro Research cannot be held responsible for any losses