Investment banks expect UK borrowing costs to fall further in 2026

GiltsAdd to myFTGet instant alerts for this topicManage your delivery channels hereRemove from myFTInvestment banks expect UK borrowing costs to fall further in 2026Gilts will outshine global peers, helped by BoE rate cuts, Wall Street lenders predictThe UK’s 10-year bond yield hit a 16-year high of 4.95% at the start of 2025 © Toby Shepheard/AFP/Getty ImagesInvestment banks expect UK borrowing costs to fall further in 2026 on x (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on facebook (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on linkedin (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on whatsapp (opens in a new window) Save Investment banks expect UK borrowing costs to fall further in 2026 on x (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on facebook (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on linkedin (opens in a new window)Investment banks expect UK borrowing costs to fall further in 2026 on whatsapp (opens in a new window) Save Ian Smith and Rachel Rees in LondonPublishedDecember 17 2025Jump to comments sectionPrint this pageUnlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK borrowing costs are set to edge down next year, according to Wall Street forecasts, as the Bank of England’s rate cuts help ease worries over the sustainability of the public finances.The UK’s 10-year bond yield, which hit a 16-year high of 4.95 per cent at the start of 2025 as worries about near-record debt issuance combined with a global bond sell-off, is expected to come down to 4.32 per cent by the end of 2026, according to the average forecast from nine big investment banks. While that is only a modest drop from the current level of 4.49 per cent, it means gilts are expected to outperform US Treasuries as investors move on from a year of acute anxiety over the level of UK government borrowing and focus on the prospect of falling interest rates and reduced gilt issuance. Wall Street banks are forecasting, in the same year-end outlooks, that 10-year US borrowing costs will be largely unchanged at 4.18 per cent.“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”.UK inflation data provided support to gilt bulls on Wednesday, as the rate fell more than expected to 3.2 per cent in November, pushing down yields as rate cut expectations intensified.Global bond yields have risen since the Covid-19 pandemic and the end of central banks’ vast asset-purchasing programmes. But sticky inflation and worries over UK government debt issuance — at £315bn in the current fiscal year, its highest on record excluding the pandemic — have contributed to the country having the highest borrowing costs in the G7. Some content could not load. Check your internet connection or browser settings.This has been compounded by a waning appetite for UK government debt from pension funds — traditionally the bedrock of demand for long-term bonds — pushing 30-year yields to their highest level this century earlier in the year.In a bid to restore market confidence and reduce what has been dubbed a “political risk premium” on UK borrowing costs, chancellor Rachel Reeves moved at the November Budget to increase the government’s “headroom” against its borrowing rules from £9.9bn to £21.7bn. Gilts rallied in the run-up to the Budget on the expectation of such an investor-friendly shift and gained in price on the day, helped by the government announcing that it would sell less long-term debt in particular.Among the Wall Street banks, Morgan Stanley is one of the most bullish on gilts next year, citing BoE rate cuts and improved supply-demand dynamics — with gilt issuance expected to have peaked in the current fiscal year — as reasons for its 3.9 per cent end-2026 target for 10-year yields. JPMorgan is more bearish, saying that the risk of a leadership challenge in the Labour party after regional elections in May next year could drive up long-term borrowing costs as investors demand a premium for uncertainty. JPMorgan expects a 10-year yield of 4.75 per cent by the end of 2026.Many investors have warned that the backloaded nature of tax rises and spending cuts planned over the next five years means they may be tough for Reeves to deliver with an election looming, and could be threatened if there is a change of Labour leadership. Investors are at present pricing in two quarter-point BoE cuts by the end of 2026, with the first expected to come on Thursday. If stubbornly high inflation frustrates those expectations, gilt yields could face renewed upward pressure.“While the fiscal concern has somewhat faded [following the Budget], the underlying growth and inflation trajectories will begin to matter once again,” said Rushabh Amin, a portfolio manager at Allspring Global Investments.Data visualisation by Jonathan VincentReuse this content (opens in new window) CommentsJump to comments sectionPromoted Content Follow the topics in this article Gilts Add to myFT UK public finances Add to myFT UK economy Add to myFT Ian Smith Add to myFT Rachel Rees Add to myFT Comments