By Stephen Jones, chief investment officer and James Lynch, fixed income investment manager at Aegon Asset Management
Way, way, back in 1998*, the UK issued a new 30-year benchmark bond, UK Treasury 6% 2028, carrying a 6% coupon. That hefty coupon (then set to align with prevailing conditions) remains the highest nominal coupon of any conventional UK gilt still outstanding today.
It also serves as a telling reference point: conditions in 1998 warranted a 6% long-term yield, and current conditions are (in many ways) less favourable. Indeed, back in 1998, long-term gilt yields were on a different trajectory, in 1997 30-year yields started near 8% and by 1999 30-year yields were at 4%. The 6% coupon of 1998 was a reference point in a multi-year bond bull market.
In 1998, the UK’s fundamentals were comparatively strong. The Bank of England’s policy rate had peaked around 7.5% mid-year, before being cut to 6.25% by December 1998. Inflation was contained and trending modestly below target (annual retail price inflation was hovering around ~2% or less by late 1998) as the Bank of England’s then-new inflation-targeting regime took hold. Real GDP was expanding at a healthy 2½–3% clip (the Treasury’s consensus forecast for 1998 was around 2.6% growth, down from a booming 1997, but still robust).
And notably, the public debt load was modest: public sector net debt stood at roughly 43% of GDP in 1998, reflecting a period of fiscal consolidation. In short, Britain had low inflation, solid growth, and a manageable debt burden—yet investors demanded a 6% yield for 30-year money.
See also: Head to head: Taking stock of gilts
One year into the Bank of England gaining independence from the HM Treasury to set monetary policy undoubtedly brought improved monetary policy credibility as a strong positive influence to the gilt market.
On the demand side of the equation a large price insensitive buyer for gilts in the form of UK defined benefit pension schemes was also beginning to awake.
The year 1997 saw the Minimum Funding Requirement (MFR) come into force, which meant pensions schemes had to hold a minimum level of assets to liabilities and the valuations of the labilities were heavily linked to gilts yields. As such, this started many years of demand for gilts from these pension schemes as they sought to match long-term liabilities with long-dated assets. Conditions for gilts and government debt funding were set fair.
Fast forward to 2025/26 and the macro backdrop has shifted dramatically. After decades of ultra-low rates and a period of QE, we have seen the UK bank rate settle currently at 3.75% (set at the end of 2025) from nearly zero two years prior, following persistent inflation and global central bank tightening. UK CPI inflation, having spiked into double digits in 2022, eased to roughly 3.3% by early 2026, still above the now much missed 2% target.
Economic growth has downshifted: UK GDP grew only ~1.4% in 2025 (a far cry from the late ’90s) amid higher interest rates and post-pandemic adjustments. Meanwhile, public debt has more than doubled relative to GDP since the 1990s: net debt stands near 94% of GDP, its highest in 60 years (aside from wartime).
Concerns over fiscal sustainability have re-entered the market’s psyche, contributing to a risk premium on UK gilts. Along with the fact the forced buying by UK pension funds has disappeared; they have allocated more to gilts over the past decades and with the rise in yields their discounted labilities (linked to gilts) have become smaller requiring fewer purchases. This is a meaningful shift and other buyer bases now fill that gap, many being overseas investors.
See also: Strategic bonds: Time for a reality check
Unsurprisingly, long-term gilt yields have surged under this mix of base rates, sticky inflation expectations, shifting and lower pension fund demand and fiscal strain. In fact, the 30-year gilt yield recently hit ~5.7%, the highest level since 1998. Investors are essentially repricing UK government bonds for a new era of “higher for longer” term interest rates and demanding compensation for inflation and fiscal risks.
In fixed income terms, bond coupons ultimately reflect the prevailing cash-rate regime, inflation outlook, and confidence in a sovereign’s credit. Back in 1998, those factors were largely positive, and the gilt market’s benchmark coupon was 6%.
Today we are hitting the same gilt yields as 1998 but on the upswing from 30-year rates near 0.5% in 2020. With higher inflation, weaker growth, and a much heavier debt load, it is perhaps little wonder that term yields are rising sharply. In fact, gilt yields may have further to climb: if policy rates remain elevated and fiscal credibility is in question, the market could require something closer to that old 6% coupon once again. Back to the future.
History suggests long-term yields loudly echo the macro backdrop. The last time we saw a 6% long gilt coupon, the UK’s economic and fiscal fundamentals were considerably stronger. With today’s conditions being more challenging, the upswing in gilt yields is hardly shocking even if it is driving headlines.
The 30-year 6% gilt of 1998 may soon look less like an historic anomaly and oddity, and more like a harbinger: the past illuminating the present, and possibly the future, of UK government borrowing costs.
*Jones was seven years into his 35-year fixed income career, Lynch was just 14 years old.
