Personal Wealth Management Monday Espresso Podcast

Monday Espresso Podcast - 7th September 2026

[00:00:00] Andrew Shaw: Today is Monday, the 7th of September. I'm Andrew Shaw, one of the investment analysts on the multi-asset team here at Marlborough. I'm delighted to be joined by James Athey, one of our fixed income fund managers. James, good morning.

[00:00:11] James Athey: Hello, Andrew. Good to be back.

[00:00:12] Andrew Shaw: Now we normally bring you the three biggest stories of the week.

[00:00:16] Andrew Shaw: This morning we're doing something a bit different because there's one story that's been running quietly underneath everything else this year, and it deserves a full episode.

[00:00:24] Andrew Shaw: That story is about the bond market and specifically what has been happening to something called the yield curve.

[00:00:29] Andrew Shaw: A quick word on markets first. The short week last week with Monday's Bank holiday in the UK, it started badly.

[00:00:35] Andrew Shaw: Renewed American strikes on Iran, and two oil tankers hit in the Strait of Hormuz, the shipping lane that carries about a fifth of the world's oil. The Dow fell more than 400 points on the Monday and US shares dropped for three days running while Brent crude pushed back above $95 a barrel. Thursday turned at around a federal reserve official pointed to US inflation improving.

[00:00:56] Andrew Shaw: Investors decided a rate rise this month was less likely, and shares posted their best day in the month, the S&P500 was up 1%.

[00:01:05] Andrew Shaw: Friday's non-farm payrolls came in at 162,000 jobs added in August. Here in the UK, the FTSE100 sits just over 10,800, still around 17% this year.

[00:01:18] Andrew Shaw: So to bonds, when a government wants to spend more than it collects in tax, it borrows the difference by issuing a bond, essentially an IOU with a fixed repayment date.

[00:01:26] Andrew Shaw: The yield is simply the annual return investors demand for lending that money.

[00:01:30] Andrew Shaw: So why are we talking about bonds on the yield curve? The Bank of England's base rate, the rate that anchors the short end of that line is 3.75% and it hasn't moved all year, but look further out along the curve and the UK government is now paying somewhere in the region 5.9% to borrow for 30 years.

[00:01:48] Andrew Shaw: And that is the highest since 1998, before some of our listeners were even born. It's a similar picture in America where 30 year borrowing costs are back at levels last seen before the financial crisis.

[00:01:59] Andrew Shaw: So short term borrowing costs are sitting still, while long-term borrow costs keep climbing, and that line is getting steeper and steeper.

[00:02:06] Andrew Shaw: Three things I want to get to this morning. What has actually happened, why it's happening, and the bit that matters most, what it means for you, whether you're an investor or simply somebody with a mortgage and a pension.

[00:02:16] Andrew Shaw: James, let's start right at the beginning. Before we get into the why, how do you explain what the yield curve actually is to somebody who has never looked at a bond in their life?

[00:02:25] James Athey: Yes, Andrew. So the yield curve quite literally describes a sort of pictorial representation of the yield of bonds of different maturities issued by the same issuer. So if we are talking about UK Gilts i.e. government bonds issued by the UK government, the UK yield curve shows you the yield that you would achieve by buying a bond with a maturity of one year, two year, three years, all the way out to around 50 years, which is about the longest dated gilt in issuance.

[00:03:02] Andrew Shaw: Thanks for that James and here's the thing that confuses people, and we did allude to it in the introduction. The Bank of England hasn't raised interest rates and yet the government's long-term borrowing costs have gone up a lot.

[00:03:13] Andrew Shaw: How can both of these things be true at the same time?

[00:03:17] James Athey: Yeah, so obviously, as you described, the very short end of the yield curve, so bonds with very short maturities, three months, six months, a year, two years, that's very sensitive to what the Bank of England does with its policy rate.

[00:03:33] James Athey: So you don't tend to find that those maturities differ greatly from the Bank of England's interest rate. It's true for bonds throughout the yield curve that part of that yield calculation for investors, part of the reason that those yields may deviate is just expectations for what the Bank of England will do in the future.

[00:03:56] James Athey: So the main core driver of the shape of the yield curve, that is to say how much higher the yield on a long dated bond is relative to a short dated bond. Or indeed, in some special cases, how much lower the yield on a long dated bond might be than a short dated bond. Relates to investors expectations for how that Bank of England policy rate, the base rate as we call it in the UK, will change in the future. That's a big one. It's not the only one.

[00:04:29] James Athey: And the stories that many of our listeners will probably have been reading over the last few weeks, focus partly on what the Bank of England is expected to do in the future, particularly because we've got quite high inflation and the difficulty of that decision because a lot of that inflation relates to the price of oil, what's happening in the Middle East, sort of inconsistent and hard to predict policies and actions of the US President. These are things the Bank of England cannot really do much about.

[00:04:59] James Athey: But they do influence our inflation rate and the bank is mandated to sort of get inflation to its target of 2%. So that's part of the story, but there are lots of other things going on.

[00:05:10] James Athey: How much the government is borrowing is a big one, and what inflation may look like over the very long term and all of those other factors, uncertainty, volatility, liquidity, these things that influence markets across the board.

[00:05:26] James Athey: They all sort of get added up into this concept that economists call term premium. And that is quite literally just the additional yield, that investors demand for lending over longer periods above and beyond their expectation for how interest rates will change.

[00:05:47] James Athey: So expectations for change in interest rates is part of it and then this term premium, which encapsulates uncertainty, volatility, liquidity, inflation growth, fiscal policy, the amount of borrowing, all those sorts of things.

[00:06:01] James Athey: And unfortunately for bond investors, both of those sides of the coin have been tending towards higher yields in recent days and weeks.

[00:06:10] Andrew Shaw: Excellent. Thank you. So nearer term, we expect yields to be closer to the base rate, but the longer you lend money to people, the more things that can happen to impact their ability to pay it back.

[00:06:22] James Athey: Exactly that. Exactly that.

[00:06:24] Andrew Shaw: So we do use the word steepening and what does a steeper yield curve actually
look like and why the bond investors care so much about the shape of that line rather than just how high it is.

[00:06:36] James Athey: Sure thing. So the yield curve, if we can all try and picture that in our minds is, you know, various points which denote the yield on bonds of different maturities. And a steepening describes a change in the yield curve where long dated yields are rising relative to short dated yields.

[00:06:56] James Athey: So if we just think in terms of, say, a two year guilt and a 30 year guilt, a very short dated part of the yield curve against a very long dated part of the yield curve.

[00:07:06] James Athey: If the two year yield went down and the 30 year yield didn't change, that would be a steepening. And we would call that a bull steepening because the price of that two year bond has gone up, hence the yield has gone down and therefore that's a bullish move.

[00:07:23] James Athey: Conversely, if the yield on the 30 year guilt increased, but the yield on the two year guilt didn't change, that would also be a steepening. We would call that a bear steepening because the 30 year yield has increased, which means its price has decreased.

[00:07:38] James Athey: Bull generally meaning a, a market which is moving up and bear meaning a market which is moving down. So of course you can get combinations. It can be the case that yields can move in one direction, in one part of the yield curve and move in the opposite direction at a different part of the yield curve.

[00:07:55] James Athey: That's relatively rare, but just when you think in terms of the shape change, ignoring the direction of yields, it's a steepening move when long dated yields are rising relative to short dated yields and a flattening move when short dated yields are rising relative to long dated yields. And to go back to the second part of your question, why we care, I think the wrong question to ask is why bond investors care?

[00:08:20] James Athey: Because we are a slightly weird bunch and we love to kind of get into the weeds, and obviously as investors we have to care more significantly about these things. Why should investors more broadly care? Why should the central bank care? There's a few key reasons. One of the most basic is that quite often the yield curve and the change in shape of the yield curve is telling us something about how investors feel about the future and how investors feel about the current stance of monetary policy.

[00:08:53] James Athey: Generally speaking, a very steep yield curve is an indicator that the future looks better than the present. Conversely, a very flat yield curve is telling you that investors are starting to feel more worried about the future than they are the present.

[00:09:09] James Athey: And in both cases, those expectations are likely to manifest in a change in monetary policy in that direction. So a steep yield curve is investors really saying that they think interest rates are likely to increase in the future. And again, that's something that we can observe in today's markets where the Bank of England, the Federal Reserve, the European Central Bank, a number of other central banks around the world, markets are currently expecting them to be forced really to increase interest rates.

[00:09:38] James Athey: Because inflation has proved sticky, oil prices remain very high in elevated and the Iran situation unfortunately doesn't seem likely to be resolved anytime soon.

[00:09:50] Andrew Shaw: That's excellent James. Thank you. So bringing it to everyday people, which of the prices in people's lives are actually set off these long-term rates rather than off the Bank of England's base rate?

[00:10:01] James Athey: Increasingly and most obviously mortgage rates. Now in the UK actually we don't have a lot of prices or rates or costs which are directly drawn from the very long end of the yield curve. That is really the domain of pension funds predominantly. It obviously is also an indication for the UK government and how credible its fiscal policies are seen to be, how willing investors are to lend to the UK government over the long term.

[00:10:28] James Athey: But for most everyday people it's the sort of one to five year area of the yield curve, which is likely to be the most important because that's particularly where mortgage rates are set.

[00:10:40] Andrew Shaw: James, that's been really clear, thank you. To summarise where we've got to the government's long-term borrowing costs of climbed to levels that we haven't seen in decades, even though the Bank of England hasn't actually touched their interest rates.

[00:10:51] Andrew Shaw: And that's because the long end of the curve is priced by investors worrying about inflation and which the government needs to borrow. Thanks again for joining me James, hope you found that useful and as always, do reach out if you've got any questions. Wishing you all a great week ahead.