What to expect from the bond market in 2026

UK borrowing costs are expected to fall further next year, according to the average forecast from nine big investment banks, as investors increasingly price in interest rate cuts from the Bank of England (BoE) after a prolonged period of restrictive monetary policy.

Britain’s 10-year bond yield, which hit a 16-year high of 4.95% at the start of 2025 — due to worries about near-record debt issuance and a global bond sell-off — is expected to come down to 4.32% by the end of 2026.

While this is only a modest drop from the current level of 4.49%, it means gilts are expected to outperform US treasuries. Wall Street banks are forecasting that 10-year US borrowing costs will be largely unchanged at 4.18%.

“We expect gilts to deliver the best return among major bond markets next year,” said Luca Paolini, chief strategist at Pictet Asset Management, pointing to a mix of BoE interest rate cuts, weaker growth and “public finances that are better than elsewhere”.

It comes as analysts broadly expect Threadneedle Street to lower rates gradually throughout 2026 as inflation continues to ease towards its 2% target.

If those cuts materialise, gilt yields could drift lower, offering modest capital gains alongside improved income returns, compared with the ultra-low-yield era that preceded the COVID pandemic.

Policymakers have warned that inflation pressures, particularly in services and wages, still remain a risk, and any resurgence could limit the scope for rate cuts and keep yields higher for longer.

Read more: Interest rates cut to lowest level in nearly three years

Although bonds generally delivered strong positive returns in 2025—with the widely followed Bloomberg US Aggregate Bond Index returning about 7% for the year as of late November—these returns have paled in comparison with the double-digit gains of many major stock indexes.

“Gilts are finally offering income again, but the days of yields collapsing back to pre-pandemic levels are very unlikely,” said James Athey, fund manager at Marlborough Investment Management. “Even with rate cuts, supply and inflation risk mean yields are likely to settle higher than investors were used to in the 2010s.”

Meanwhile, Ruth Gregory, deputy chief UK economist at Capital Economics, has said: “The Bank of England will cut rates, but it will do so cautiously. That implies some downward pressure on gilt yields, but not a dramatic repricing.”

Goldman Sachs Research expects the BoE to cut rates three times in the first half of next year, reducing its policy rate to 3% by the summer of 2026.