As Hollywood searches for the next James Bond, the Scottish Government is hunting for a Bond of its own. Far less glamourous perhaps but the stakes are equally high.
The question now is whether Scotland’s Bond will prove to be a long-running fixture, like Roger Moore’s celebrated tenure as 007, or a shorter chapter more reminiscent of Timothy Dalton’s time in the role.
Unlike its cinematic counterpart, however, this Bond will be judged not by its box-office success, but by investors’ appetite, borrowing costs and the confidence it inspires in the market. Before the opening credits roll, it is worth understanding what a government bond actually is, how it works, and what it could mean for Scotland’s public finances.
Background
The Scottish Government Bonds Programme was developed following a recommendation from the Independent Investor Panel that Scotland should consider issuing bonds in capital markets to diversify funding sources, raise Scotland’s profile with investors and establish a market track record.
In November 2025, the Scottish Government published a summary Outline Business Case (OBC) assessing the case for the Bonds Programme. The OBC concluded that a multi-year wholesale bond programme would be the most effective way of meeting the programme’s objectives. It found that bond issuance had the potential to offer value for money, support Scotland’s capital investment ambitions and operate within the Fiscal Framework’s borrowing limits. However, any decision to proceed remains subject to further value-for-money assessments, with the ultimate case for issuance likely to depend on market conditions and the cost at which Scotland can borrow.
What is a bond?
A bond is simply a loan from investors to a government or a corporation. This type of loan provides the government or corporation that issues a bond with up front funding, and a fixed rate of income to those who provide the funding. In the UK, government bonds are known as gilts, a reference to the gilded edges that once appeared on bond certificates.
While Sean Connery made Scotland synonymous with Bond, Scotland’s own Bonds, or “kilts” as they have been nicknamed, would serve a more practical purpose: borrowing money to invest in infrastructure and public services.
When investors buy a bond, they lend money to the government or corporation in exchange for regular interest payments and the return of their original investment when the bond reaches its maturity date.
Bonds can also be bought and sold before they mature, meaning their market price changes over time. Those price movements are influenced by a range of factors, including interest rates, economic conditions, alternative investment opportunities and investors’ perceptions of risk. While UK gilts are generally considered one of the safest investments available, investors may demand higher returns if they become concerned about the ability of the UK Government to repay, for example due to rising levels of public debt or a deterioration in the wider economic outlook.
The overall return an investor receives by holding a bond until maturity is known as its yield. This includes both the interest payments received and any gain or loss resulting from purchasing the bond at a price different from its original value.
Bond prices and yields move in opposite directions. When bond prices rise, yields fall and vice versa. For example, if interest rates rise, newly issued bonds may offer more attractive returns, reducing demand for older bonds. Their price may fall as a result, pushing their yield higher. The relationship is why movements in bond yields are closely watched by governments, investors and financial markets.
Scottish Government’s Bond Programme
The Scottish Government plans to establish a £1.5 billion bond programme during Session 7 of the Scottish Parliament, making Scotland a direct participant in international markets for the first time.
The Scottish Government has confirmed:
“that all proceeds from a future bond issuance would be used exclusively for capital investment in line with the capital borrowing powers outlined in the Fiscal Framework agreement between the Scottish and UK Governments.”
For capital expenditure the Scottish Government can borrow up to £450 million annually, and £3 billion cumulatively, in 2023-24 prices. This means for the purposes of the 2026-27 Scottish Budget the limits are calculated as £491 million and £3,275 million respectively.
Following the 2023 Fiscal Framework Review, the Scottish Government reviewed its capital borrowing policy to ensure the facility could continue to support the capital budget over the medium term in a fiscally sustainable way. In the Scottish Government Borrowing memorandum, published alongside the 2025-26 Scottish Budget, the following guidelines were adopted to assess any capital borrowing decision:
- Use £300 million of capital borrowing per annum as the default assumption;
- This will be amended as necessary to meet budget specific or in-year requirements; and
- Ensure, by way of a fiscal test, that at least £1.5 billion of capital borrowing headroom remains available for the subsequent parliamentary term.
In November 2025, the Scottish Government received credit ratings from Moody’s (Aa3) and S&P Global (AA), both of which are equivalent to the UK’s credit rating. The credit rating agencies highlighted the requirement for the Scottish Government to balance its budget, and the institutional framework within the UK providing a level of certainty. The Scottish Government highlighted the rating as an indication of Scotland’s fiscal credibility and an important milestone in building a profile among international investors.
While Scottish Ministers would ultimately decide whether to issue bonds, the programme is subject to multiple layers of independent scrutiny. Borrowing plans are assessed by the Scottish Fiscal Commission, audited by Audit Scotland, and developed through established Scottish Government governance processes that require detailed consideration of affordability, value for money and deliverability.
An important point to consider is the cost of borrowing. There is some consensus that bonds will be more expensive than existing routes provided by the UK Government through the National Loans Fund. “Kilts” will cost more – fund managers estimate interest rates 0.3 percentage points above gilts, plus an additional £2 million per bond in administrative costs.
According to Ben Cormier (Senior Lecturer at the University of Strathclyde) and Patrick E. Shea (Senior Lecturer at the University of Glasgow), “kilts” will have a modest material impact. They noted that, based on 2025-26 figures, the:
“£300 million annual borrowing represents less than 0.5% of Scotland’s £60 billion budget, and the debt ceilings set out in the Fiscal Framework prevent total Scottish borrowing from exceeding £3.1 billion.”
Nevertheless, the Scottish Government argues that direct bond issuance offers opportunities to build investor relationships that are not available through borrowing from the National Loans Fund.
Bonds and the Global Market
The question of borrowing costs cannot be separated from the wider market conditions in which any Scottish bonds would be issued. Recent increases in global bond yields mean that any future Scottish Government bond issuance would take place in a more expensive borrowing environment than has existed for much of the past decade.
Table 1 of the Scottish Government’s bonds programme business case sets interest rates 0.11 percentage points above the interest rate on UK gilts. The challenging economic environment ultimately means borrowing from the National Loans Fund will also be increasingly expensive.
The Office for Budget Responsibility (OBR)’s most recent economic and fiscal outlook illustrated that nominal and real 10-year government bond yields have risen in all G7 economies since March. The OBR observe that this is likely to partly reflect the impact of higher energy prices on inflation and on monetary policy expectations and rises in real yields. Some commentators have also pointed to sustained, large fiscal deficits in many advanced economies and competition for financing from increased AI investment as factors pushing up yields.
While these higher borrowing costs largely reflect wider international economic conditions rather than Scotland-specific factors, they would increase the cost of servicing debt and could influence assessments of whether bond issuance offers value for money.
Demand from investors would also be important. Scottish bonds would be competing for investment alongside UK gilts, other government debt, and corporate debt, with pricing likely to be influenced by factors such as market confidence in Scotland’s fiscal framework, the perceived strength of its institutions, and the purpose for which borrowed funds are being used. Together, these factors would help determine both the level of investor demand and the interest rates at which any bonds could be issued.
The Scottish Government may have found its Bond. Whether it can offer investors a licence for attractive returns remains to be seen.
Rachel Cook, Senior Researcher, Financial Scrutiny Unit, SPICe