W1M continues to favour UK gilts as the Bank of England cuts rates to 4.0%

The Bank of England has cut rates for the fifth time since last August but is not encouraging the market to expect the pace to be maintained given inflation risks remain. The market is expecting perhaps two further cuts leaving rates around 3.5% by the middle of next year possibly. Much could change by then, of course!

The global economic environment has its challenges with even the US now showing signs of slowing, impacted by trade war uncertainty and higher prices resulting from tariffs. UK growth has been sluggish, with taxes going up on employers and rising unemployment, but is not very out of line with European peers. The US economy has been the standout growth story in the last decade, significantly outperforming large European economies.

Sluggish growth, despite the risk of slightly higher UK inflation relative to peers, allows The Bank of England to cut rates. This is not a fantastic economic environment but a rate cut is nevertheless positive for gilts (UK government bonds) and the consensus is that there are further rate cuts to come in the next 12 months.

• W1M remains overweight UK government bonds given inflation likely to move towards target over time, enabling further rate cuts;
• Gilts currently look relatively attractive compared to credit;
• Gilts give portfolios an element of diversification and protection in a macro and geopolitical environment which could easily see more sentiment-crushing volatility (e.g. from further trade war intensification);
• Gilts can also be tax efficient holdings for UK domiciled taxpayers;

W1M’s James Carter wrote this week answering the question: Is the UK Bankrupt? Happily, the answer is no, despite many challenges. In terms of the G7, the UK remains in the middle of the pack for growth and also for debt to GDP. In terms of debt to revenues, it is interesting to see that the US and Japan are in the weakest position; Germany still stands out on these measures but has lagged the US and also the rest of the Eurozone in terms of growth in the recent past.

UK government dept/GDP and debt/revenue

Source: Moody's ratings. Data as at 28th July 2025.

G7 10-yr government bond real yields

Source: Bloomberg. Data as at 28th July 2025.