UK Gilts 2035: A Strategic Entry Point Amid Rising Yields and Strong Market Demand

The UK gilt market in 2025 presents a compelling case for investors seeking to capitalize on favorable yield levels and robust demand dynamics. With yields on 2035-maturing bonds ranging from 4.25% to 4.625%, the UK government's long-dated debt has become a magnet for capital in a world where central banks are aggressively unwinding stimulus and global bond yields are normalizing. For investors with a medium-term horizon, the current environment offers a rare alignment of attractive returns and structural market tailwinds.

Yield Attractiveness: A Premium Over Global Peers

The UK's 2035 Gilts are trading at yields that outpace those of other major economies. For instance, the 4.625% Treasury Gilt maturing in January 2034 currently offers a yield of 4.625%, while the 4.25% Gilt due in March 2035 yields 4.387%. These figures are significantly higher than the 3.72% yield on the UK 2-year Gilt and the 4.55% yield on the 10-year Gilt as of August 2025. By comparison, U.S. Treasury yields for similar maturities hover around 4.25%, and German bund yields remain below 3%.

This yield premium reflects the UK's relatively strong credit fundamentals. Despite concerns about fiscal sustainability, the country's low default risk and robust governance structure continue to underpin demand. The Bank of England's aggressive quantitative tightening (QT) program—selling gilts acquired during the pandemic—has further elevated yields by reducing liquidity in the market. While this creates short-term volatility, it also enhances the appeal of UK Gilts for income-focused investors.

Investor Demand: A Market in Transition

Domestic institutional demand for UK Gilts has waned, with pension funds and insurance companies reducing their holdings as they shift toward higher-yielding assets. However, this decline has been offset by strong retail and international demand. Recent auctions of shorter-dated Gilts have seen oversubscription ratios of 2–3 times, indicating that investors remain confident in the UK's ability to service its debt.

Foreign ownership of UK Gilts, at around 30% of the total stock, adds another layer of complexity. While this exposes the market to capital flight risks, it also means that global investors are actively pricing in the UK's fiscal trajectory. The recent shift toward sterling-denominated assets—driven by the pound's strength against the dollar—has further bolstered demand. Morningstar Wealth, for example, increased its allocation to UK debt in its June 2025 portfolio rebalance, citing the country's “robust governance and competitive yields.”

Strategic Entry Points: Balancing Risk and Reward

The key to capitalizing on the current environment lies in identifying strategic entry points. The 2035 Gilts, with their intermediate maturities and attractive yields, offer a sweet spot for investors seeking to hedge against inflation while securing income. For instance, the 4.25% Gilt due in March 2035 trades at a clean price of £96.87, implying a running yield of 4.387%. This is a compelling return in a world where cash yields are near zero and equity valuations remain stretched.

However, investors must remain mindful of structural risks. The UK's public debt-to-GDP ratio, which has approached 100%, and the government's reliance on foreign capital to fund its deficit are long-term concerns. The Autumn Budget in late 2025 will be a critical test of fiscal discipline. If the government can demonstrate a credible path to reducing borrowing while maintaining growth, the yield premium on UK Gilts could narrow further, enhancing capital gains for early entrants.

Conclusion: A Case for Prudent Optimism

The UK Gilt market in 2025 is at a crossroads. Rising yields and strong demand create a favorable backdrop for investors willing to navigate short-term volatility. The 2035 Gilts, with their combination of income generation and capital preservation potential, represent a strategic entry point for those aligned with the UK's fiscal and economic trajectory. While risks such as QT-driven volatility and fiscal uncertainty persist, the current environment offers a unique opportunity to secure above-market returns in a well-anchored asset class.

For investors with a 5–7 year horizon, the 2035 Gilts warrant serious consideration. The key is to balance yield capture with prudent risk management, ensuring that positions are sized to withstand potential shocks while benefiting from the market's long-term normalization.