- Nine major banks expect the UK 10-year gilt yield to ease to about 4.32% by end-2026 from roughly 4.48% now (after a ~4.95% peak in early 2025).
- Goldman Sachs is more optimistic, forecasting around 4.00% by end-2026 on BoE rate cuts, cooling inflation and reduced gilt supply.
- Disinflation, improved fiscal headroom and slower debt issuance are seen as key supports for lower borrowing costs.
- Political turmoil, stickier inflation and fewer-or-later BoE cuts than markets price could push yields back up.
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The UK gilt market is entering a phase in which modest easing in borrowing costs is broadly expected through 2026, as multiple catalysts converge while material risks remain.
Forecasts and market expectations: The average prediction from Wall Street banks put 10-year gilt yields at 4.32 % by end-2026, a drop from the_start-of-2025 peak of 4.95 % and current levels around 4.48 %. Notably, Goldman Sachs projects a more aggressive decline to ~4.00 %, assuming multiple rate cuts by the Bank of England (BoE), easing inflation, and reduced gilt supply. Morgan Stanley is on the same incremental track, whereas more cautious players like JPMorgan see significant upside to yields if political risks materialize.
Drivers of decline: Inflation is coming down — CPI eased to 3.2 % in November 2025, lower than expectations. The BoE’s November Monetary Policy Report projects inflation to drop to ~3.2 % by Q1 2026 and gradually converge toward target, assuming cooling wage growth and a fading of administered-price pressures. On fiscal policy, the Chancellor’s doubling of the so-called “headroom” (from ~£9.9 bn to ~£21.7 bn) and signals of reduced long-term gilt issuance improve credibility and supply/demand dynamics.
Risks and uncertainties: Political risk looms large — JPMorgan warns that a Labour leadership challenge post-May 2026 regional elections could increase risk premia, lifting gilt yields. Inflation sticking above target — especially in services, food, or wages — could disrupt rate-cut assumptions, putting yields back upwards. Another constraint is fiscal delivery: back-loaded tax rises and spending cuts may be difficult to deliver ahead of elections, threatening credibility. Finally, market expectations currently price in two quarter-point BoE cuts by end-2026; if the BoE moves slower, yield compression may be limited or reversed.
Strategic implications: For investors, gilts may offer relatively attractive returns versus US Treasuries in 2026, particularly if market expectations for UK rate cuts and fiscal discipline hold. Duration exposure should be calibrated to the risk of inflation surprises. For the UK government, falling borrowing costs would relieve debt servicing burden, allowing more fiscal flexibility. But the government must maintain policy consistency, deliver promised consolidation, and manage political risk to avoid damaging market confidence.
Open questions:
- Can inflation decelerate fast enough, especially in non-energy and services sectors, to justify the current pace of expected rate cuts?
- Will fiscal reforms promised to boost “headroom” be implemented credibly, or will political pressures drift policies off course?
- How will external shocks (e.g. oil prices, global supply disruptions) affect UK inflation and thus gilt yield expectations?
- What is the risk if rate cuts are delayed—how much upside do yields have, and what is the impact on public borrowing costs?
Supporting Notes
- The average forecast among nine big investment banks puts the UK’s 10-year gilt yield at ~4.32 % by end-2026, down from about 4.48 % when the forecast was published.
- Goldman Sachs expects yields to fall to about 4.00 % by end-2026, based on expected BoE cuts, lower inflation and improved supply‐demand in gilt markets.
- UK CPI inflation unexpectedly dropped to 3.2 % in November 2025, boosting expectations for rate cuts and helping to bring gilt yields lower.
- The Bank of England’s November Monetary Policy Report forecasts inflation falling to 3.2 % in Q1 2026, with gradual easing in wage pressures and fading administered price effects. Policy rate is expected to decline toward ~3.5 % in second half of 2026 in the central case.
- Fiscal credibility is improved: Chancellor Rachel Reeves increased the Government’s “headroom” under borrowing rules from ~£9.9 bn to ~£21.7 bn.
- Gilts’ yield advantage over US Treasuries: US 10-year Treasury yields are expected to remain roughly at ~4.18 % into end-2026 while gilts are forecast to outperform if UK outlook holds.
- JPMorgan warns political risk — specifically, a Labour leadership challenge following regional elections in May 2026 — could force higher risk premium and yield pressures. Also caution over back-loaded tax/spending plans ahead of an election.
- Investors are pricing in two quarter-point BoE rate cuts by end-2026; if inflation stays high, these expectations could be disappointed, pressuring yields up.