Artemis: Gilt market volatility isn't all down to the 'moron premium'

Investment view from Stephen Snowden, Head of Fixed Income

Related funds | Artemis Strategic Bond Fund

Since Liz Truss and Kwasi Kwarteng’s disastrous mini budget sent a wrecking ball through the gilt market in September 2022, the ‘moron premium’ has entered common parlance, at least within financial circles. The phrase, which refers to sovereign debt yields rising because of politicians’ mistakes, was brought out of retirement and dusted off when 30-year gilt yields spiked in August and September 2025, peaking around 5.7%¹. 

‘Borrowing costs surge as Britain faces ‘moron premium’ under Reeves’, proclaimed The Telegraph in late August². While this sounds harsh, I would acknowledge that the UK government has made mistakes, some of which are reflected in high gilt yields. 

The chancellor’s ill-advised fiscal rules have robbed her of flexibility, especially when married to a cast-iron guarantee that there will be no increases in income tax, employee national insurance or VAT. She is rummaging down the back of the sofa for a billion here and a billion there, publicly road-testing various tax hikes from stamp duty to bank windfall taxes. Irrespective of your politics, the market doesn’t believe the numbers add up. 

But that is far from the whole story. Many other contributing factors explain why 30-year gilt yields are where they are, including the erosion of their natural buyer base as more pension funds go to buyout.  

This isn’t all down to the ‘moron premium’. What causes market shocks is unknown information, whereas everybody knows we have an unpopular government with low approval ratings. 

The main reason gilts sold off this summer was, in my view, a more hawkish tone at the Bank of England. Although the Monetary Policy Committee cut rates by a quarter point on 6 August, it needed two rounds of voting to push the cut through, which the market decided does not bode well. The Bank of England’s quantitative tightening programme is adding to the pressure. 

Bond yields are essentially an expression of where interest rates will average out over the long term, which is largely a function of where inflation will settle. Inflation has been sticky because wage growth has been persistently high, and although inflation is currently falling, it appears to be doing so more slowly than people had hoped. This means interest rates will come down at a slower pace and consequently, bond yields could go up a bit further (pushing valuations down). 

What’s more, the recent gilt sell-off was not an isolated incident and needs to be put into a global context. Yield curves around the world steepened this summer and in fact, the US and Germany experienced more aggressive steepening in August than the UK. 

Britain isn’t the only developed nation running a large budget deficit and issuing lots of bonds. Nor is it the only country grappling with sticky inflation. 

Global headline inflation across G10 regions (the US, EU, UK, Canada, Australia, New Zealand, Switzerland, Norway, Sweden and Japan) moved above 2% in April 2021³ and peaked back in October 2022. Although considerable progress has been made, it still hasn’t returned to target and the post-Covid higher inflation period has now stretched to four and a half years. This has obviously had significant consequences for consumer behaviour and wage demands and it will continue to impact price setting in the future. 

In other words, it looks like the world has settled into a higher inflation regime, which ultimately means the interest rate cutting cycle has not got much further to run. 

Fiscal policy levers are turning in response to increased geopolitical threats and tariff shocks, as governments rush to insulate domestic demand. This should exert further upward pressure on prices. 

In a higher-for-longer environment, the light at the end of the tunnel consists of elevated coupons. Investors are now being compensated with decent real yields. 

For long-dated gilts, where a double helping of worry is already in the price, the valuation light is starting to flash. We view the gilt market as brutally cheap, although it could always become even cheaper.  

Meanwhile, another prominent politician – this time from across the Atlantic – has a track record of spooking markets and driving up risk premia. Donald Trump in his second term is proving to be even more unpredictable and bold in policy announcements than during his first and global leaders are turning to more extraordinary actions (think Germany’s fiscal package or Canadian protectionism) to grab a foothold in the new world order. The geopolitical/fiscal landscape has rarely been in such a state of flux. How are we, as investors, meant to position our portfolios in such circumstances? 

One thing we have been doing in our Artemis Strategic Bond Fund, within its corporate bond allocation, is de-risking. We want to free up firepower to take advantage of any spread decompression, should risk markets wobble into year-end. It’s difficult to pinpoint a specific catalyst for such an event, however given the multitude of risks and geopolitical uncertainty, a more prudent approach feels appropriate. 

Notes and references

¹Source: CNBC, 30-year gilt yields hit 5.69% on 2 September 2025 

²Source: https://www.telegraph.co.uk/business/2025/08/26/borrowing-costs-near-1998-high-reeves-struggles-balance/ 

³Source: Artemis, 9 October 2025 

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