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UK gilts follow global yield trends
26/06/2026
Why UK yields are now driven more by global rates than domestic politics
The announced resignation of UK Prime Minister Keir Starmer marks a significant political turning point. However, financial markets reacted with notable restraint. This calm response is telling. It suggests that investors are focused less on political headlines and more on whether the UK’s monetary and fiscal policy framework is changing significantly. So far, the answer appears to be no.
For many years, gilts occupied a stable middle ground between U.S. Treasuries and Bunds.[1] This reflected clear macroeconomic differences. The Federal Reserve acted earlier and more decisively to keep U.S. yields relatively high, while the European Central Bank (ECB) kept German yields low through negative rates and asset purchases. The UK, with higher inflation than the Eurozone but less cyclical pressure than the U.S., sat in between. Consequently, gilt yields consistently traded above Bunds but below Treasuries.
This relationship tightened in 2022 before breaking abruptly. The trigger was the so-called 'Liz Truss moment,' when an unfunded fiscal package led to a sharp selloff in the markets. For investors, this marked a turning point, as fiscal credibility in the UK could no longer be taken for granted. Since then, gilts have been viewed less as a 'midpoint' and more as a distinct market, clearly sensitive to global rate movements.
In our view, the closer alignment of gilts with Treasuries in recent months reflects three main factors. Firstly, the UK risk premium has declined since the Truss episode. Secondly, the monetary-policy profiles of the Bank of England and the Federal Reserve have converged. Inflation remains persistent in the UK, suggesting that interest rates may need to remain high for longer than previously expected. Thirdly, both markets are increasingly shaped by global real rate dynamics, whereas Bunds are more strongly influenced by considerations specific to the ECB.
Against this backdrop, the muted market reaction to Starmer’s resignation comes as no surprise. The announcement felt more like the completion of an ongoing adjustment than a new shock. Some of the political risk premium had already been factored in. What matters now is whether the trajectory of economic policy changes. As long as this does not happen, market reactions are likely to remain contained.
We remain constructive on gilts, although we think the current yield level somewhat moderates their attractiveness. This view is supported by easing inflation, a softening labor market, and a central bank that can afford to be patient. Lucas Brauner, UK economist at DWS, sums it up: 'For the Bank of England, little changes following the resignation. Monetary policy is already restrictive, and the current environment argues more for patience than for additional rapid rate increases.”
The message for investors is clear. The headlines come from Westminster. However, the direction of gilts will likely continue to be driven by global rates, the Bank of England and fiscal credibility. As long as these factors remain unchanged, political noise is likely to have only a limited impact on the markets.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 6/23/26
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.