Should you be worried about your mortgage? Gilts are volatile and the answer is: it's complicated

The short answer is probably no, and the slightly longer one not yet. So what has been going on in recent days and what are the likely repercussions?

Financial markets certainly appear to have turned on Rachel Reeves since her late October Budget, which was designed to raise more than £40 billion in taxes, in large part through a raid on employers’ national insurance contributions. That move has already been slammed by countless businesses and lobby groups as a tax on growth and hiring.

Recent days have seen the yields on UK bonds surge to their highest level since the 2008 financial crisis, while the pound has fallen against other key currencies. That volatility has occurred despite the fact there has been no major UK economic data published so far in 2025.

Culture Secretary Lisa Nandy has sought to reassure Britons about turbulence in the markets and has insisted that the Labour government’s tax and spend rules are “non-negotiable". However, the Chancellor is said to be prepared to impose more severe spending cuts on departments if necessary to balance the books, having already ruled out increasing either borrowing or taxes.

Asked whether people should be concerned about the gilt volatility, Nandy told Sky News: “I don’t think we should be worried. It’s obviously something we take very seriously, but these are global trends that have affected many countries, most notably the United States, as well as the UK.

“We are still on track to be the fastest growing economy, according to the OECD in Europe. We’re not going to borrow for day-to-day spending.”

Interest rates - known as the yield - on government bonds have been nudging higher since around August, prior to the autumn Budget, and that trend has also been seen in the US and other countries. The yield on a ten-year bond has surged to its highest level since 2008, around the time of the last global financial crisis, while the yield on a 30-year bond has touched its highest since 1998, meaning it costs the government more to borrow over the long term.

The gilt sell-off has been underpinned by a number of factors, including the likely direction for interest rates in the US under the incoming Trump administration. However, worries over the outlook for the UK economy have exacerbated market jitters closer to home.

Despite the upbeat projections on growth given by government ministers, many economists now expect the Office for Budget Responsibility to adjust its economic forecasts in March. And that is likely to see Reeves searching for ways to raise extra cash at her planned March 26 spring statement, or potentially before then.

Parallels have been drawn with the fallout from former prime minister Liz Truss’ 2022 mini-budget as the rise in yields has an inverse effect on the price of government bonds, which are dropping as a result. That mini-budget had an almost instant impact on the mortgage market - something that has not happened this time, though there is likely to be some knock-on effect.

In the region of 700,000 homeowners are facing an increase in mortgage costs when their fixed-rate deals come to an end in the coming months. Mortgage rates had been predicted to ease this year in line with a series of cuts in the bank base interest rate by the Bank of England. Inflationary worries and global volatility could see the central bank row back on that fiscal easing, leading to higher borrowing costs for longer than expected.

So-called swap rates, which are tracked by lenders and are the major influence on the pricing of mortgages, have also risen of late. Given that most homeowners and buyers fix their mortgage rate for two years, five years or even longer, the hike in borrowing costs that followed that 2022 mini-budget is hitting households over several years. Two-year sterling interest swap rates - a gauge of the average rate over 24 months - have risen from just under 4 per cent in mid-September to above 4.5 per cent. For hundreds of thousands of mortgage holders, the misery is likely to continue for some time.

ING Senior European rates strategist, Michiel Tukker, said: “The sharp rise in yields can partly be attributed to fiscal concerns but should be framed against significantly higher rates in both the US and eurozone.

“What markets may be underestimating is how higher rates also pass through to growth and inflation by tightening financial conditions. The Bank of England is now priced to cut rates by just [half a point] this year, resulting in a constraining bank rate of 4.25 per cent. And the increase further out on the curve will hurt investment activity through lending rates. Lower growth and inflation should help bring rates down eventually, thereby capping the upward potential for gilt yields from here in our view.”

Gilts eased back slightly after early trades, but remained up several basis points after a week of volatility.