UK Bonds Set for Rally as Rate Cuts Approach, Says Goldman Sachs
George Cole, senior European market strategist at Goldman Sachs, is doubling down on a constructive view for UK government bonds.
Key Takeaways
- Goldman Sachs sees UK 10-year gilt yields falling to 4.0% by end-2026.
- The call is based on Bank of England rate cuts toward 3.0% and easing inflation.
- Markets are pricing fewer cuts, making Goldman’s view more aggressive.
- UK gilts currently offer a higher yield premium than peers, which could narrow if easing begins.
As of mid-February 2026, he expects a strong rally in gilts that could push the benchmark 10-year yield down to 4.0% by year-end – a notable move from current levels near 4.41%.
The call comes at a time when global bond markets are moving in different directions, shaped by diverging monetary policies, fiscal pressures and inflation dynamics across major economies.
Bank of England Rate Cuts as the Main Catalyst
Goldman’s central thesis hinges on policy easing from the Bank of England. The bank expects the BoE to cut its policy rate to 3.0% by the summer of 2026, down from 3.75% today.
The key argument is that disinflation is likely to continue, even after a period of stubborn price pressures. If inflation trends toward 2.3% by the end of the year, policymakers may have room to ease more aggressively than current market pricing suggests.
That shift could compress yields across the curve, with the 10-year gilt falling roughly 40 basis points from present levels to reach the 4.0% target.
Political Risk vs. Macro Backdrop
Despite upcoming local elections and lingering fiscal concerns, Cole believes the so-called “UK risk premium” will not derail the broader bond rally. In his view, macro fundamentals – weaker growth and cooling inflation – will ultimately outweigh political nerves.
Recent GDP data support that narrative. The UK economy expanded just 0.1% in the fourth quarter of 2025, reinforcing expectations that tighter policy is no longer warranted.
Not Everyone Is as Bullish
Other forecasts paint a more cautious picture. Some projections suggest the 10-year gilt yield could hover around 4.28%–4.33% over the next 12 months, implying a shallower decline than Goldman anticipates.
Market pricing also signals skepticism. Investors currently expect only one or two additional BoE rate cuts in 2026, with a perceived floor closer to 3.25%–3.5%, not the 3.0% level Goldman forecasts.
How the UK Compares Globally
Bond markets in the US and euro area are following different paths.
United States: Treasury Yields Near a 3% Policy Floor
Federal Reserve policy is expected to ease further, with Goldman projecting rate cuts in March and June 2026, potentially bringing the federal funds rate toward 3.0%–3.25%.
Forecasts for the 10-year US Treasury vary widely, ranging from 3.75% on the dovish end to as high as 4.50% if inflation proves sticky and the Fed pauses its easing cycle. Additional uncertainty stems from the upcoming expiration of Jerome Powell’s term as Fed Chair in May 2026, which could add volatility to the intermediate segment of the curve.
Germany: Bunds Pressured by Record Supply
In contrast, Germany faces upward pressure on yields due to fiscal expansion and record net debt issuance, estimated at around €234 billion in 2026.
The 10-year Bund currently trades near 2.8%–2.9%, with projections suggesting it could climb toward 3.25% by year-end if supply-driven repricing continues. The relatively steady stance of the European Central Bank, with the deposit rate expected to hold around 2.0%, provides less downward momentum compared to the anticipated easing cycle in the UK.
The “Gilt Premium” Opportunity
One of the pillars of Goldman’s bullish view is valuation. UK gilts currently offer a higher yield than many peers, and the spread over German Bunds remains elevated. Some asset managers describe gilts as trading near their cheapest levels in a decade relative to US Treasuries.
Cole’s expectation is that as the Bank of England moves decisively on rate cuts and inflation continues to cool, that premium will narrow – driving prices higher and yields closer to the 4.0% mark by the end of 2026.
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