Rising gilt yields and elevated equity markets

Financial markets are currently delivering contrasting messages about the outlook for the UK and global economy. Equity markets in both the UK and the United States remain close to record highs, while long term government borrowing costs have risen sharply. In recent comments, Sarah Breeden, deputy governor of the Bank of England and head of financial stability, warned that asset prices appear high despite a wide range of economic and financial risks.[1] At the same time, investors have pushed UK gilt yields to their highest levels since the late 1990s.[2]

These developments have drawn attention to a growing divergence between bond and equity markets. While shares continue to reflect optimism about future growth and corporate earnings, bond markets are increasingly focused on inflation, geopolitical risk and the prospect of higher interest rates for longer.

The Bank of England’s concerns about asset prices

Speaking to the BBC at the end of April, Breeden said that asset prices globally are at all‑time highs even though there is “a lot of risk out there”.¹ She added that the Bank of England expects there will be an adjustment at some point, although she declined to say when this might occur or how severe it could be.

Her remarks were framed in the context of financial stability rather than market forecasting. Breeden highlighted the risk that several pressures could materialise at the same time, including a macroeconomic shock, stress in private credit markets and a reassessment of valuations linked to artificial intelligence investment. The central issue for the Bank of England, she said, is how such an adjustment would affect the wider economy and whether the financial system is resilient enough to cope.

It is unusual for a senior Bank of England official to speak so directly about market levels, potentially reflecting heightened concern among policymakers about how risks are being priced.

However, these comments should not be taken as forecasts or statements of fact. Investing is inherently long term, and decisions should not be made in response to external commentary alone. Individuals should consider their own circumstances and, where appropriate, speak with a financial adviser or investment manager before making investment decisions.

Why UK borrowing costs are rising

While equity markets have remained resilient, the bond market has taken a more cautious view. Yields on UK government bonds, particularly at the long end of the curve, have risen sharply. [3] Thirty year gilt yields have reached levels not seen since 1998, while ten year yields are close to their highest point in nearly two decades. The immediate trigger has been renewed concern about inflation.[4] Rising oil prices linked to conflict in the Middle East have increased the risk that inflation remains elevated for longer than previously expected.[5] As a result, traders have adjusted their expectations for monetary policy, with markets now pricing in the possibility that the Bank of England may need to raise interest rates further rather than begin cutting them.

Fiscal and political factors have also played a role. The UK already faces the highest long term borrowing costs in the G7, and higher yields increase pressure on public finances.² Government debt interest costs exceed £100bn a year, making the Treasury particularly sensitive to movements in market rates.²

The relationship between bond yields and equities

Long term interest rates play a critical role in financial markets because they influence borrowing costs and asset valuations across the economy. When yields rise, the cost of financing can increase for households, businesses and governments. Higher rates also affect how investors value future corporate earnings, particularly for companies whose profits are expected further into the future.

Despite this, equity markets have continued to perform strongly. In the US, large technology companies investing heavily in artificial intelligence infrastructure have been a key driver of market gains.[6] In the UK, the FTSE 100 has also moved close to its all‑time high, despite having fewer technology stocks and a greater exposure to more mature industries.[7]

This divergence between bond and equity markets is notable. Historically, periods of sustained increases in long term yields have tended to coincide with either lower equity valuations or more subdued real returns over time.[8] The current situation suggests that different parts of the market are pricing the economic outlook in very different ways.

Private credit and financial stability risks

Another area highlighted by Breeden is the rapid growth of private credit, often described as part of the “shadow banking” system. Over the past 15 to 20 years, private credit has expanded to around $2.5tn globally, providing financing to businesses outside the traditional banking sector.¹

While this growth has broadened access to capital, it has also introduced new risks. Some private credit funds have recently reported losses and imposed restrictions on investor withdrawals, raising concerns about liquidity and transparency.[9] Importantly, the sector has not yet been tested through a severe downturn at its current scale.

From a financial stability perspective, policymakers are concerned that stress in private credit could amplify the impact of a broader market correction, even if the traditional banking system remains well capitalised.

What this means for the wider economy

Higher long term borrowing costs tighten financial conditions across the economy. They can affect mortgage rates, business investment decisions and government finances. At the same time, strong equity markets support household wealth and business confidence.

The Bank of England’s role is not to prevent market adjustments, but to ensure that the financial system can withstand them. Breeden’s comments underline the importance policymakers place on resilience, particularly in a period where multiple sources of risk could interact.

For now, markets remain finely balanced. Whether the gap between bond market caution and equity market confidence narrows gradually or more abruptly will depend on how inflation, geopolitical risks and economic and financial conditions evolve in the months ahead.