A view from London

This experience is not unique to gilts though. Government bonds across the western world, such as US treasuries or German bunds, have sold off over the last few years. The post-pandemic spike in inflation and subsequent interest rate rises have hit bond prices, which move inversely to inflation and interest rates. (This is because higher inflation reduces the real value of debt owed to investors.)

But gilts seem under greater pressure than their peers. The UK's borrowing costs - measured by the yield on gilts - is the highest among G7 economies. This is a sea-change from the pre-pandemic period, when Italian, US and Canadian borrowing costs were consistently higher than the UK's.

The underperformance is particularly striking when one looks at indebtedness. According to latest estimates from the International Monetary Fund, the UK is less indebted than all of the G7 economies except Germany. Some of its fundamental fiscal challenges, such as an ageing population, slow productivity and GDP growth, and the need for greater welfare and defence spending, are also shared with a number of peers.

So, what explains this pressure on gilts?

First, the UK seems particularly susceptible to inflation. Its greater reliance on imported gas, both for heating and as a key determinant of electricity prices, amplifies the effect of energy shocks. Compared to peers, prices for a larger proportion of services in our inflation basket also see annual rises indexed to headline inflation, which serves to entrench price pressures. The UK also suffers from labour shortages, from time to time, and there are pockets of growing inactivity among the working-age population, which exert upward pressure on wages. These structural factors are reflected in market inflation expectations, which run at much higher levels for the UK than for the US or Europe.

Second, the majority of defined benefit pension schemes - the primary buyers and holders of long-dated gilts for decades - are now closed to new members. As a result, these funds have largely retreated from the gilt market. Some of the slack left by them has been picked up by hedge funds but their active risk management practices make them less steadfast holders of assets. Overall, the lack of a natural buyer for these instruments now exerts downward pressure on gilt prices and has pushed up yields.

Third, with defined benefit pension funds reducing their gilt holdings, the share of UK debt held by non-UK-residents has risen sharply, increasing our reliance on what Mark Carney, former governor of the Bank of England, called "the kindness of strangers". At the turn of the millennium, domestic pension funds and insurers held almost three quarters of the total value of gilts in issuance, and non-residents held just under a fifth. At the end of last year, pension funds' and insurers' holdings had fallen to under a fifth, and that of non-residents risen to a third.

Fourth, the Bank of England's active unwinding of quantitative easing has also contributed to pressure on gilts. The Federal Reserve and the European Central Bank (ECB) are winding down their quantitative easing programmes passively, by waiting for government bonds to mature before they are cleared off their balance sheets. By contrast, the Bank is selling its holdings of gilts. As the Bank holds a much larger proportion of long-dated bonds, clearing them passively off its balance sheet would take a long time.

Finally, the UK has also recently experienced higher levels of political uncertainty than its peers. With four prime ministers over the last six years and growing speculation over a potential leadership contest in the ruling Labour Party, there remains considerable doubt over the future path of fiscal and economic policy. As a result, investors seek a premium for holding gilts, with political headlines directly translating to changes in borrowing costs.

The UK's public finances and the structural factors listed above mean its debt will remain the subject of greater investor scrutiny. And this pressure on gilts will affect policymaking. A meaningful reduction in its influence requires a pickup in growth and serious gains in productivity.

Last week, the ECB published a report that found gold has overtaken US government bonds as the top reserve asset for central banks.

This reflects strong demand for the safe-haven commodity amid growing geopolitical uncertainty and diversification away from US treasuries. It also reflects gold's meteoric rise in recent years, increasing 115% in price since 2024 (almost triple the gains made by the FTSE 100 UK equity index and nearly double the S&P 500 US equity index).

However, I was surprised to see that the price of this safe haven has fallen 15% since that start of the war in Iran. What’s going on here?

The conflict has resulted in higher oil prices and inflation, increasing market expectations for interest rates. My colleague Tom Avis tells me that this has raised the appeal of interest-earning assets compared to gold, which yields no income and incurs storage costs. A stronger US dollar in recent months has also made gold more expensive for non-US investors.

Does this mean the price of gold has already reached an inflection point? Analysts think not. Strong demand for it is expected to continue, and, subject to a de-escalation in the war in Iran, analysts foresee a reversal in gold’s decline by the year-end.