Earlier this month, gilt yields reached their highest point since 2008, leading analysts to suggest that this could lead to higher mortgage rates.
In the weeks that followed, many lenders increased their rates, but it was a “mixed picture”.
We sat down with several experts to explain the link between gilt yields and swap rates, and the outlook for swap rates.
What are gilt yields?
Jason Hollands, managing director at Evelyn Partners, said bonds are essentially an ‘IOU’ note issued by governments and corporates wanting to borrow money from investors over a variety of time periods.

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“Conventional bonds offer a fixed rate of interest (known as the coupon) and will eventually be redeemed at the price they were issued at on a set maturity date. However, once issued, they are traded on the financial markets, and so prices can rise or fall depending on factors like the inflation and interest rate outlook and market confidence in the issuer.
“The combination of the fixed interest bonds pay and any annualised gains or losses to be made if held to maturity are together known of the ‘yield’, and this can therefore be compared to equivalent cash savings rates available,” he explained.
Why have they been going up?
Sarah Coles, head of personal finance at Hargreaves Lansdown, explained that at the start of the year, there was bond market upheaval due to fears around inflation, which made bonds less attractive as they “offer a fixed income, which is less valuable at times of high inflation”.
“This, plus wobbles about the UK in general after the Budget, meant there was a sell-off. When bond prices fall, it automatically pushes the yield up, because the yield refers to the fixed income as a percentage of the price. If, for example, a bond cost £100 and paid a yield of 6% – or £6, then if the price fell to £50 and it still paid £6, that yield would be 12%,” she said.
She noted that the gilt yield is what the ‘swaps market’ cares about, as this is where a bank will go if it has offered a fixed rate mortgage and wants to hedge its exposure to interest rate risk.
“If the yield rises, then the price of a swap rises, so it’s more expensive to hedge the risk. It makes it pricier for the bank to offer the fixed rate, so passes that extra cost on to customers,” Coles added.
She noted that the mortgage market reaction was “relatively slow this month” as banks waited to see if the swap markets would “calm”, which they did, as inflation figures were lower than expected.
Coles said the movement in swap rates so far in 2024 has ended up raising the average two-year fixed rate mortgage from 5.48% at the start of the year to 5.52% this week.
Rachel Springall, finance expert at Moneyfacts, said that while changes in swap rates typically lead to increased mortgage rates, lenders can “go against such a trend if it suits their plans”.
“For instance, some smaller lenders… cut rates as they are perhaps keener for new business. Our own data over the gilt volatility showed mixed rises, cuts launches and withdrawals, so again, this comes back to why it can take a week or two for lenders to catch up,” she added.
She noted that swap rates are lower than the 30-day rolling highs, but lenders do not instantly change their pricing and it can take a couple of weeks.
The latest figures from Chatham Financial figures show that two-year swaps stood at 4.15% as of 22 January, a slight fall on 4.1% on 23 December.
Five-year swaps were priced at 4.01% on 22 January, an increase from 3.98% from 23 December.
Two-year gilts are priced at 4.35% as of 22 January, a drop from 4.39% on 23 December. Five-year gilts have risen from 4.34% on 22 January, which compares to 4.35% on 23 December.
10-year gilts were pegged at 4.64% on 22 January, a rise from 4.56% on 23 December.
What is the expectation for gilt yields and mortgage pricing for the rest of the year?
Hollands said there is currently a “fair amount of uncertainty” about the outlook for the global economy and interest rates, some of which depends on whether the new Trump administration will implement trade tariffs or force the US Federal Reserve to raise American rates.
“Higher trade costs and a stronger dollar would both be inflationary for the UK – pushing up the cost of imports – and might in turn impact the Bank of England’s own decisions on rates. But it is also possible that fears around resurgent inflation will ease and confidence in the UK economic outlook improves, which might see bond worries dissipate and gilt yields subside too.
“In the meantime, those facing looming remortgaging events over the next couple of years would be wise to consider whether they can take steps to reduce their loans or adjust their budgets to accommodate for potentially much higher interest payments,” he explained.
Coles agreed that it was “difficult to know where it goes from here, because the situation in the US is so changeable that it could alter inflation expectations overnight”.
“One underlying factor is that the UK economy is expected to be weak, and inflation and interest rates are expected to be on their way down this year. It just might not be a straight line,” she noted.