Bank Rate Holds at 3.75%, But the Two-Year Decline Has Already Reshaped Fixed Income
The Bank of England left its base rate unchanged at 3.75% on 11 August, the fifth consecutive hold after a run of reductions brought it down from the 5.25% peak reached in August 2023. Three members of the Monetary Policy Committee voted for an increase, according to the minutes published alongside the decision, while the majority judged inflation was cooling enough to justify holding rather than cutting further. For UK investors building fixed-income portfolios inside ISAs and SIPPs, the two-year descent from that peak has already done its work: gilt yields have fallen, investment-grade corporate bond yields have followed at a distance, and the gap between the two has become the main lever left for anyone still chasing income from bonds rather than cash.
Gilt Yields Track the Rate Cycle, With a Lag
Gilts are issued and auctioned by the UK Debt Management Office, and their yields move broadly in line with expectations for the path of the Bank Rate rather than the rate itself on any single day. Maturing within two or three years, short-dated gilts tend to track the base rate most closely, since holders are effectively locking in a return close to what a cash deposit or a money-market fund would pay over the same period. Further out on the curve, gilts running to 15 or 30 years respond more to expectations for where inflation and interest rates will sit years from now, which is why the yield curve has flattened rather than fallen uniformly as the Bank Rate has come down. That flattening matters for anyone reinvesting a maturing gilt this year — the pickup in income from extending duration is smaller than it was when the Bank Rate sat above 5%.
Corporate Bonds Keep a Spread — And the Risk That Comes With It
Investment-grade corporate bonds, debt issued by companies rated BBB- or above by agencies including S&P, Moody's and Fitch, continue to yield more than gilts of comparable maturity. Fund managers call that gap the credit spread, and it exists to compensate holders for the risk that a company, unlike the UK government, could default or be downgraded. As the Bank Rate has fallen, some of that spread has narrowed too, since lower borrowing costs generally support corporate profitability and ease refinancing pressure on debt-heavy balance sheets. High-yield, or sub-investment-grade, corporate bonds pay noticeably more again, but they carry a correspondingly higher chance of an issuer missing a coupon payment or restructuring its debt entirely — a risk that becomes more visible, not less, whenever economic growth slows.
Wealth managers describe a broader shift among cautious savers who spent 2023 and 2024 parked almost entirely in short-dated gilts and money-market funds, and who are now looking further along the risk curve now that cash rates have come down alongside the Bank Rate. Sterling corporate bond funds from managers such as M&G, Fidelity and Royal London sit at very different points on that curve, though — some hold almost entirely investment-grade paper with short average maturities, while others blend in high-yield and overseas issuers, and the difference shows up in both the quoted yield and how much the fund's price moves when sentiment turns.
The Tax Wrapper Still Decides the Real Return
Gilts held directly outside a wrapper carry one advantage corporate bonds do not: gains on individual gilts are exempt from capital gains tax, a rule that has applied to UK government debt for decades. Corporate bond gains, by contrast, are taxable outside an ISA or SIPP in the same way as gains on shares. Interest income is where the two converge — coupon payments from both gilts and corporate bonds count as taxable income once they exceed the personal savings allowance, which is why the £20,000 annual ISA allowance and the tax-free growth inside a SIPP end up mattering more to most investors' actual return than the small headline-yield gap between a gilt and a similarly dated corporate bond.
Duration Risk Cuts Both Ways
Whichever instrument an investor chooses, the underlying exposure is to interest rate movements over the bond's remaining life, and that exposure grows with duration regardless of whether the issuer is the UK government or a FTSE 100 company. A 10-year gilt and a 10-year corporate bond from a similarly rated issuer will generally move in the same direction if the Bank Rate changes again, even though the corporate bond's price also reacts to anything specific to that company's own credit standing. Some multi-asset income funds have shortened average portfolio duration this year, favouring bonds maturing within five years over the 15- and 30-year gilts that dominated pension fund buying during the higher-rate years, on the view that the extra yield from longer maturities no longer compensates for the added price sensitivity.
That shortening carries its own trade-off. Locking into shorter maturities protects against further rate surprises, but it also means reinvestment risk arrives sooner: whatever gilt or corporate bond an investor buys today with a three-year maturity will need replacing at whatever yields the market offers in 2029, and nobody currently pricing that market can say with any certainty whether the Bank Rate will be higher, lower or unchanged from 3.75% by then.
What the Debt Management Office's Issuance Calendar Signals
The Debt Management Office publishes its gilt issuance remit each spring, setting out how much government debt it plans to sell across short, medium, long and index-linked maturities over the financial year. A remit weighted toward shorter maturities tends to ease pressure on long-dated yields, since it reduces the supply investors need to absorb at the long end of the curve; a remit weighted toward longer gilts does the opposite. Pension funds and insurers, which are structurally required to hold long-dated, inflation-linked assets to match their future liabilities, remain the largest buyers of 30-year and index-linked gilts regardless of where retail sentiment sits — one reason long gilt yields have not fallen in step with the Bank Rate even as short-dated yields have moved almost one-for-one with it.