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Whilst the consensus is that interest rates have further to fall, it may be that we are nearer the end of the rate-cutting cycle than the beginning. This article looks at the key pressures and opportunities in the government bond markets. We use the short hand of “vigilantes” but really all this means is the collectivity of bond buyers and traders.
For largely domestic reasons, the Bank of Japan has already had to push base rates up. The Bank of England followed the Fed in December in cutting rates, but only by a narrow 5:4 majority on the MPC. The ECB has a “hawkish hold”, implying a sustained pause to any further cuts. Elsewhere we are also seeing a pause to cuts. In Australia the RBA held its 3.6% cash rate in December with inflation still above target, and expectations for a cut in February are evaporating.
The political pressure on the Fed to cut continues to grow, with what must be assumed to be a politically motivated criminal investigation of Jay Powell, Federal Reserve chair. Powell’s term ends in May and a Trump-appointed successor will be selected on the basis of sharing the President’s view that rates must come down. It is not a certainty that the Senate will automatically approve the appointment, and the Fed is not obliged to come into line with its chair, but the heat will be on.
The underlying problem that the President would rather the Fed ignored is the size of the deficit. Debt service costs ($345bn in 2020, an estimate of over $1 trillion this year) are growing both with the deficit and as old low coupon bonds mature. Tariffs make a contribution to Federal financing, but not enough to make a difference (and there is an argument too that the inflationary effect of tariffs will start becoming more evident in 2026):
Ex-Prime Minister Liz Truss managed to attract a “moron premium” for gilts, which arguably has not entirely dissipated – or perhaps has been renewed. The US seems to be attracting something similar, with the President upsetting traditional allies without making new friends (or at least not ones who can afford to buy large volumes of Treasuries). The reaction to the Greenland threats has been pressure on the dollar and also provided some (as yet) small evidence of politically influenced Treasury sales (e.g., and not surprisingly, from Denmark).
The 21 January inflation report showed December at 3.4% compared to 3.2% in November and the consensus 3.3%. Core inflation (excluding energy, food, alcohol and tobacco) however was static at 3.2%. Food was up 4.5%, which affects the perception of affordability. Services inflation was 4.5% vs 4.4% in November. The market is now not expecting an MPC cut until June. Whilst the latest private sector wage growth for the three months to November +3.6%, lowest in five years, public sector pay growth remains far higher. Still- at least borrowing seems for now to be under control, even if inflation is stubborn.
There is plenty of evidence that, despite the efforts of central banks to cut policy rates, the markets are proving resistant. Last year, despite the falls in central bank rates, the bond markets barely responded. The MPC cut the UK Bank rate from 4.75% to 3.75% over the year, Fed Funds went down from 4.33% to 3.64%, and the ECB deposit rate from 3% to 2% (Japan was of course the outlier – the call rate was 0.25% at the end of 2024 and is now 0.75%). But, as can be seen in the below table, that was not reflected in bond yields, as the markets have doubted longer-term commitments to fiscal responsibility and to keeping inflation down. Here are the 10 year government bond yields changes from the last three years:
The failure of US and UK government bond rates to respond to the falls in central bank rates can be seen graphically in steepening yield curves – here is the UK vs a year ago:
And the USA:
Investors would traditionally view a steepening yield curve as a bullish sign for the economy as it reflects expectations of future growth and income. However, currently in the US it is more of a consequence of the market pricing in future rate cuts, rather than robust growth, and indeed such steepenings have coincided with recessions in the past. The UK steepening has been driven as much by the stickiness of long-term yields due to structural and fiscal concerns, rather than falling short-term yields, reflecting relatively higher risk premia demanded by investors on long-dated gilts, rather than any economic optimism.
A consequence for the UK seems to be that the Debt Management Office (DMO), which historically has looked to keep the maturity of the gilts in issue long, is trying to do more funding at the short end. This is unlike the Fed which has been able to rely on a very liquid T-bill market, and until relatively recent years did not issue beyond 10 year bonds. Within £228bn of gilts issued by auction in 2025, for example, only £10bn had maturities of more than 10 years (leaving aside index linked gilts). The UK T-bill market with maturities issued weekly at one, three and six months, is comparatively small. £104bn were outstanding at the end of 2025, but this only represented an £8bn increase over the year, so a tiny contributor to the c. £3,000 billion of overall public sector debt. In the US by contrast, 84% of new debt issuance in 2025 was through Treasury bills with 12 month or less maturity – the largest auction, at $100bn, for a single bill was almost as large as the entire sterling market. Across Europe we are seeing the same phenomenon, with the average maturity of debt in other major markets dropping below ten years.
It is therefore interesting that the DMO has this month launched a consultation on how to expand the T-bill market, presumably to make the market more user friendly to allow an expansion of issuance and a reduction in funding costs. Of course, this is not a risk-free exercise for the Treasury, the shorter the maturity profile of government debt, the greater the refinancing risk. The consultation can be seen here.
LGB provides access to the T-bill market through Credo: please talk to us for details. At the latest auction (23 January) average yields were 3.790% for the three month and 3.747% for the six month maturities.
The gilts yield curve has a peak above 5% at the 30 year maturity – this is not new, but it may become less of a feature. Very long-term gilts have been the province of pension fund managers and insurance companies seeking to match long term liabilities (annuities, and defined benefit pensions). With the progressive disappearance of the funded defined benefit pension schemes (many public sector schemes are unfunded), the need for long duration bonds has been in steady decline. If, however, the DMO is stopping to issue them – as seems now to have happened – then the decline of supply will start to balance the decline of demand and we may start to see a fall in yields and a rise in prices.
Investors willing to take inflation risk (in that the high nominal return will be eroded by inflation) may find these long-dated gilts attractive. If inflation is brought back under control for a sustained period and we see rates move down across the curve, they would provide both a capital gain and income. Moreover, under current rules, gilts trading at a discount to par offer part of the return (the accretion to maturity at par) tax free. For example, the TR54 (a 1 5/8% 2054 gilt) currently (26 January) priced at £46.7 yields 5.23% to maturity – of this 1.5% is tax free.
Despite the consensus that UK and US rates have further to fall, the easy gains seem to have been made in shorter term government paper. Investors may prefer to lend to governments for the higher rates available for longer maturities rather than the lower rates available for short term bills and bonds. In the UK, if inflation is indeed subdued, we could anticipate a flattening of the yield curve driven in part by the reluctance of the Bank to issue more long term paper and its stated enthusiasm for supplying the market with more short dated bills. This would reward holders of longer term bonds. The further up the yield curve, the more inflation protection is embedded in the higher yields – but the higher the price volatility. Investors may wish to take that risk, or look instead at index linked gilts. Otherwise, the search for yield should lead back to corporate bonds – and MTNs.
Transaction Manager
Alexia Rottet joined LGB in October 2025 as a Transaction Manager. Prior to LGB, she gained real estate experience by participating in the valuation of a property portfolio for A2immo.ch SA as a financial analyst, as well as working at Form Structural Design as an office manager. Alexia holds an MA in Entrepreneurship and Innovation and a BA in International Relations.
Relationship Manager
Ruby joined LGB in December 2024 as an Assistant Relationship Manager for our investing clients. She is responsible for all day-to-day transactions with investment clients and oversees the LGB Investments Platform and Deal Hub. Prior to LGB, Ruby worked at FHIRST, a start-up where she collaborated with the co-founders on revenue growth and improving client experiences. Ruby graduated with a First-Class degree in History from Durham University, and has obtained the CISI Level 4 Diploma in Investment Advice.
Finance Manager
Following a degree reading Chemistry at The Queen’s College, Oxford, Antonia trained to become a chartered accountant at a London-based audit firm. She then moved into the tax sector joining EY and completing the chartered tax adviser qualification. She then gained further experience working as a finance director within industry at a family office / hedge fund.
Programme size: £20m
Establishment Date: December 2017
Number of issues: 12
Sector: Marine tracking
Focus: Maritime surveillance and management
Programme size: £25m
Establishment Date: XX 2017
Number of issues: 20
Sector: Financial services
Focus: Loans and leasing
Associate Director
Omar joined LGB in February 2026 as an Associate Director in the Capital Markets team. He brings over five years of experience from NatWest, where he worked across the Leveraged Finance Origination and Portfolio Management teams. During this time, he supported a broad range of businesses from venture-backed to large-cap companies, with a primary focus on the mid-market. His experience was sector agnostic, and the majority of the companies he worked with were sponsor-backed, giving him extensive exposure to private equity-led transactions and capital structures. Omar holds a degree in Accounting and Finance from The London School of Economics & Political Science and is a Chartered Banker.
Adviser
Charles has played an important role in developing LGB & Co.’s investment approach by encouraging a focus on investing in businesses with strong IP or know-how with recurring revenue business models that can prosper throughout economic cycles. Charles brings over 30 years’ experience of investing in privately-owned and publicly-listed small and mid-market companies. He is a director of Larpent Newton & Co. and Hygea VCT plc. Charles qualified as a Chartered Accountant at Peat Marwick, now part of KPMG.
Adviser
Lisa has worked with LGB since 2015 in supporting the on-going cultural and organisational development of the firm, providing advice on strategic people matters. Since 2006, Lisa has been running her own consultancy and executive coaching business, People Possibilities Ltd. Her work is focused on supporting clients at an organisational, team and individual level to enable high performance,improve leadership capability and effect cultural and behavioural change. Previously Lisa has held senior HR leadership positions with Schroders, ABN AMRO and HSBC. Lisa graduated from the University of Birmingham with an honours degree in International Relations & French. She is a Fellow of the Chartered Institute of Personnel and Development (CIPD) and a qualified Executive Coach.
Chairman
Simon became non-executive Chairman of the Board of LGB & Co. with a focus on growth and strategic initiatives in December 2025. Simon has extensive experience in capital markets and wealth management. He previously ran the client and investment business of Heartwood and became Chief Executive in 2008. He led its well-regarded acquisition by Handelsbanken in 2013. Simon subsequently became NED and Chair of AIM-listed WH Ireland Group PLC. He was also asked to represent the wealth management sector on the FCA Smaller Business Practitioner Panel from 2013-2016.
Associate Director
Megan joined LGB in 2021 as a Relationship Manager. She is responsible for all day-to-day transactions with investment clients and oversees the LGB Investments Platform and Deal Hub. Prior to LGB, Megan worked at Puma Investments, a tax-efficient investment provider, in the sales and investor services team. Megan graduated from the University of Bath with a Bachelor of Science degree in Psychology, and has obtained the CISI Level 4 Diploma in Investment Advice.
Managing Director
Simone joined LGB in 2012 and is responsible for LGB & Co.’s business with institutional investors, wealth managers and sophisticated private investors. Simone’s team provides access to a range of compelling investment opportunities with a particular emphasis on structuring laddered portfolios of fixed income. In addition, the team manages portfolios of clients who have entered into advisory agreements with LGB Investments, and advises the fund managers of the Guernsey-based LGB SME Private Debt Fund. Prior to joining LGB & Co., Simone worked in the institutional fixed income department of Citigroup Global Markets. She began her career at Citigroup Private Bank in Geneva. Simone graduated from the University of Lausanne with a degree in HEC, Business Administration. She is a Chartered Member of the Chartered Institute for Securities & Investments and a Director of LGB.
CEO
Cedric was appointed CEO in July 2022 after a period of 18 months as a COO. Cedric spent 15 years working on the energy and commodities sales and trading desks for global banks (BNP Paribas, BAML and MUFG). He gained extensive international exposure, being based in London and Singapore and covering transactions in all geographic regions. Cedric graduated from Global Executive MBA at INSEAD in 2018 and started working in the capital markets space for growth-stage companies. He is also a director of LGB.
Managing Director, Capital Markets
Andrew founded LGB & Co. in 2005 and is managing the Capital Markets team. He has a particular focus on the development of strategic relationships with corporate clients and business partners. Prior to founding LGB & Co., Andrew was a Managing Director at Citigroup Global Markets, where he was responsible for its fixed-income business with private banks and retail institutions. Earlier in his career Andrew worked at Schroders in London and Tokyo. Andrew graduated from Oxford University with a degree in Modern History. He is a chartered member of the Chartered Institute for Securities & Investment.