Getting ahead of the curve

One of the differences between an analyst and an accountant is that the analyst will want to plot a graph from the lines of data. There are lots of numbers in our line of work and the question we ask is what does it tell us ? Human beings have always looked for meaning in the world around us and using our senses to detect a path or to predict that which awaits us around the corner.

It is generally thought to be a good indicator if one is ahead of the curve, being a few steps ahead of the competition or anticipating a change in the market perhaps. But lately market watchers have been pre-occupied with inflation (amongst many other things) and In the ever-evolving world of fixed income and fiscal policy, private investors seeking to stay ahead must pay close attention to the shape and shift of the yield curve.

This week, the UK gilt yield curve has captivated financial markets with a pronounced steepening, particularly at the long end. Understanding why that is happening—and what it may imply for investment portfolios in the months ahead including the likely direction of interest rates—is critical. Equally compelling is a parallel look at economic theory via the Laffer Curve, and how it may frame the UK's tax-revenue dynamics amid speculation ahead of the next Autumn Budget.

The UK Gilt Yield Curve: What’s Going On?

At the start of this autumn term UK government bond yields have surged. According to the FT the 30-year gilt yield has climbed to the highest level since 1998, hovering between 5.68% and 5.72%, while 10-year yields sit near 4.75%.

The steepening of the gilt curve (meaning the widening gap between short and long-term yields) signals rising long-term borrowing costs. This reflects investor anxiety over the UK’s fiscal sustainability: elevated public debt nearing 100% of GDP, large budget deficits, and increasing supply of gilts are among the key drivers. Although demand has been strong in recent gilt auction (£14 billion of issuance was 10 times oversubscribed) yields have soured to their highest levels since the Global Financial criss: and yes the now infamous Truss-Kwartang budget too. Former chancellor Mark Carney once remarked that Governments rely on the kindness of strangers but that kindness also comes at a price.

All these numbers deserve a graph and the chart below shows the shape of the Gilt Yield over different times periods comparing Augusts in 2020,21,22 and 2025.

In defence of the current Government, global factors have compounded these pressure. ( rising yields in the U.S. and Europe, inflation concerns, and monetary uncertainty) has prompted a broader bond-market sell-off. But as Brits we should not take too much comfort from knowing that the French are having a bad week too.

Those readers still with us may well ask what does this mean and why does it matter to a private investor?

A long-dated gilt with a yield of 5.6% may seem enticing but they are vulnerable to interest rate shifts, inflation surprises or fiscal policy shifts. This duration risk (as it is called) is a topic that consumes our underlying portfolio managers and so we leave it for them to make those judgements and assess the hedging strategies for our clients’ portfolios and whether to go long or short.

The Laffer Curve - Theory or Trap?

The mention of fiscal policy shift is my cue to mention the other curve that has reached common parlance lately. Enter the Laffer Curve named after US economist Arthur Laffer whose hypothesis illustrates a theoretical relationship between tax rates and government tax revenues. At both extremes (0% and 100% tax rates) government revenues are zero. The Laffer Curve suggests that raising tax rates beyond a certain point can be counterproductive, potentially lowering tax revenue because of behavioural responses like reduced work or investment in tax mitigating schemes, or even relocation. You may well have read recent reports in the press warning that the UK likely is approaching (or may have crossed) to the “bad side” of the Laffer Curve. Commentators argue that rising tax burdens, weak growth, and high debt ( coupled with the mobility of wealthy individuals and corporations) could start to reduce tax receipts, despite rate hikes. Indeed Eclipse Private Office in common with our peers has received increasing numbers of enquiries about Golden Visa schemes over the summer months.

So the Laffer Curve is more than theoretical in the UK’s current context. Facing a widening fiscal gap of £41.2 billion by 2029/30, the government is under pressure to raise revenues—yet doing so may risk falling into that Laffer trap.

Proposed measures under consideration include freezing income tax thresholds beyond 2028, reforming council tax, VAT, pension allowances, CGT, and property taxes—some of which could be perceived as over-aggressive by market participants.

In the most recent Budget (October 2024), Chancellor Rachel Reeves implemented the largest tax rise since 1993, including higher employer National Insurance, limited inheritance tax relief on rural estates, and indexation of income tax thresholds—all lifting the tax burden to record levels.

So markets are bracing for the upcoming Autumn Budget in November, and speculation is focussed on whether the Chancellor will pursue further tax rises or seek to restore confidence through reforms and spending discipline—or risk pushing the UK ahead of the Laffer Curve. We shall have to wait and see on that but if you have any specific concerns then do get in touch with us or your own independent financial adviser.

Drawing the Curves Together: Yield and Laffer

Both the gilt yield curve and the Laffer Curve underscore critical nonlinear dynamics:

On the yield curve: small shifts in investor sentiment, economic data, or fiscal announcements can disproportionately move long-term yields, steepening (or flattening) the curve in ways that challenge models and hedges.

On the Laffer Curve: small changes in tax structure or rate thresholds could either boost revenues—or, if miscalculated, provoke revenue erosion due to behavioural shifts. For private investors, the lesson is similar: sensitivity to curves requires both vigilance and adaptability. Just as fixed income investors may suffer from unintended exposure to duration risk when the yield curve steepens, policymakers may suffer from unintended revenue shortfalls if tax rates breach behavioural thresholds. Recognising nonlinearities—rather than assuming linear responses—is essential.

Thanks to ChatGPT for pulling in some of the data and writing the conclusion in this article by Max Weatherby.