diff --git a/src/ophyd_async/core/_signal.py b/src/ophyd_async/core/_signal.py
index d4d4d7ffe..cf16ea798 100644
--- a/src/ophyd_async/core/_signal.py
+++ b/src/ophyd_async/core/_signal.py
@@ -449,12 +449,6 @@ async def observe_value(
     """
 
     q: asyncio.Queue[SignalDatatypeT | Status] = asyncio.Queue()
-    if timeout is None:
-        get_value = q.get
-    else:
-
-        async def get_value():
-            return await asyncio.wait_for(q.get(), timeout)
 
     if done_status is not None:
         done_status.add_callback(q.put_nowait)
@@ -462,7 +456,10 @@ async def get_value():
     signal.subscribe_value(q.put_nowait)
     try:
         while True:
-            item = await get_value()
+            # yield here in case something else is filling the queue
+            # like in test_observe_value_times_out_with_no_external_task()
+            await asyncio.sleep(0)
+            item = await asyncio.wait_for(q.get(), timeout)
             if done_status and item is done_status:
                 if exc := done_status.exception():
                     raise exc
diff --git a/tests/core/test_observe.py b/tests/core/test_observe.py
new file mode 100644
index 000000000..e68b08465
--- /dev/null
+++ b/tests/core/test_observe.py
@@ -0,0 +1,90 @@
+import asyncio
+import time
+
+import pytest
+
+from ophyd_async.core import AsyncStatus, observe_value, soft_signal_r_and_setter
+
+
+async def test_observe_value_working_correctly():
+    sig, setter = soft_signal_r_and_setter(float)
+
+    async def tick():
+        for i in range(2):
+            await asyncio.sleep(0.01)
+            setter(i + 1)
+
+    recv = []
+    status = AsyncStatus(tick())
+    async for val in observe_value(sig, done_status=status):
+        recv.append(val)
+    assert recv == [0, 1, 2]
+    await status
+
+
+async def test_observe_value_times_out():
+    sig, setter = soft_signal_r_and_setter(float)
+
+    async def tick():
+        for i in range(5):
+            await asyncio.sleep(0.1)
+            setter(i + 1)
+
+    recv = []
+
+    async def watch():
+        async for val in observe_value(sig):
+            recv.append(val)
+
+    t = asyncio.create_task(tick())
+    start = time.time()
+    try:
+        with pytest.raises(asyncio.TimeoutError):
+            await asyncio.wait_for(watch(), timeout=0.2)
+        assert recv == [0, 1]
+        assert time.time() - start == pytest.approx(0.2, abs=0.05)
+    finally:
+        t.cancel()
+
+
+async def test_observe_value_times_out_with_busy_sleep():
+    sig, setter = soft_signal_r_and_setter(float)
+
+    async def tick():
+        for i in range(5):
+            await asyncio.sleep(0.1)
+            setter(i + 1)
+
+    recv = []
+
+    async def watch():
+        async for val in observe_value(sig):
+            time.sleep(0.15)
+            recv.append(val)
+
+    t = asyncio.create_task(tick())
+    start = time.time()
+    try:
+        with pytest.raises(asyncio.TimeoutError):
+            await asyncio.wait_for(watch(), timeout=0.2)
+        assert recv == [0, 1]
+        assert time.time() - start == pytest.approx(0.3, abs=0.05)
+    finally:
+        t.cancel()
+
+
+async def test_observe_value_times_out_with_no_external_task():
+    sig, setter = soft_signal_r_and_setter(float)
+
+    recv = []
+
+    async def watch():
+        async for val in observe_value(sig):
+            recv.append(val)
+            setter(val + 1)
+
+    start = time.time()
+    with pytest.raises(asyncio.TimeoutError):
+        await asyncio.wait_for(watch(), timeout=0.1)
+    assert recv
+    assert time.time() - start == pytest.approx(0.1, abs=0.05)