The yield on 10-year gilts rose to over 1 per cent on Tuesday (11 October) for the first time since the day of the EU referendum result. While 1 per cent is still a low yield by historical standards, it is almost double the yield of the 10-year gilt at its lowest point, which was 0.52 per cent on 12 August 2016.
The yield on 10-year gilts has risen sharply in the last week in tandem with sterling's decline, because investors are dumping sterling assets, including gilts, as fears over a hard Brexit appear to be gathering momentum.
The yield on the 10-year gilt has risen from 0.73 per cent last Monday (3 October) to 1 per cent today, while sterling has fallen from $1.30 to $1.24.
Before the EU referendum result, the yield was 1.37 per cent. In the wake of the uncertainty created by the Brexit vote, nervous traders rushed to snap up high-quality assets such as UK government bonds, which is why yields fell initially.
GLIMMER OF HOPE
In early August the Bank of England (BoE) cut the base rate by 0.25 per cent and announced more quantitative easing in response to the Brexit vote.
Following the interest rate cut, 10-year gilt yields dropped to new lows, and annuity rates - which were already feeling the pain of Brexit uncertainty as investors flocked to gilts as a safe haven, forcing yields lower - took yet another nasty hit as a result.
Now that yields have risen, there is a glimmer of hope for pension schemes' funding and those about to retire.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: 'Gilt yields have ticked up sharply over the last week, and given what's happened on the currency markets it looks like a fair assumption that overseas investors are dumping UK government bonds.
'The back up in yields may offer some glimmer of hope for companies with pension deficits, though, as these liabilities look smaller at higher interest rates, and finance directors worrying about their next scheme valuation might well be urging yields up further.
'Of course bond yields are still exceptionally low, but anyone holding government bonds has seen their capital value fall since the market peaked in August, and by quite some margin for longer-dated bonds.
'There may also be knock-on effects in the mortgage markets, as lenders may find they can't finance new fixed-term mortgages at the same low rates they could just a few weeks ago.'
As well as pension schemes, individuals at retirement and planning to buy an annuity - a guaranteed income for life - with their pension pot have also suffered from falling gilt yields.
When the BoE cut the base rate, it didn't do those about to retire any favours. When the government buys bonds, gilt yields fall, and gilt yields shape annuity rates.
Moreover, a recent report compiled by the Centre for Economic and Social Research found that many people underestimate the amount of savings they need in retirement.
If a healthy 65-year-old buys a single inflation-linked annuity today for £150,000, this will translate into an income of less than £4,701 in the first year.
This issue is becoming more pressing as the total number of active defined contribution scheme members (reliant on investment-based pension funds) is expected to overtake the number of defined benefit scheme members (who receive a salary-related pension) by 2018.
Commenting on the gilt yield rise, Philippa Gee, managing director at Philippa Gee Wealth Management, says: 'This highlights that we have moved into a new environment with bonds and the warning bells are ringing ever louder as to how these assets will fare in the future.
'The issue for investors is that, traditionally, bonds have been used to decrease risk and add in more security than equities, however if tradition no longer applies, then cautious investors will need to dramatically rethink the composition of their portfolios.'