Goldman Sachs strategists forecast that UK government bonds will rise in 2026, driven by interest rate cuts from the Bank of England, which will push government borrowing costs to their lowest levels since 2024.

George Cole, a senior European market strategist at the bank, stated that the yield on the benchmark 10-year UK government bond is expected to reach 4% by the end of this year. He believes that a 40-basis-point decline, based on falling inflation prompting the Bank of England to act, will outweigh concerns stemming from political risks.

In a client report, Cole noted, "Although UK risk premiums and political uncertainty may remain elevated during the upcoming local elections, we believe that a favorable macroeconomic environment will drive bond yields lower."

Due to persistent inflation making Bank of England policymakers cautious about cutting interest rates, the UK's borrowing costs are higher than those of other countries. Investors are also concerned about the nation's fiscal situation. Earlier this month, UK bond yields surged as Prime Minister Keir Starmer faced the risk of being forced out of office, with potential successors possibly seeking to increase borrowing.

Cole indicated that with local elections approaching in May, political uncertainty persists, and the Labour Party, led by Starmer, is expected to underperform, which could keep risk premiums at elevated levels. However, he pointed out that such fluctuations have historically pushed bond yields up by an average of only 30 basis points and are typically short-lived.

Strict fiscal constraints on the UK government also help mitigate political risks. Cole noted that this "ultimately limits the magnitude of policy shifts in potential government changes."

Reduced macroeconomic uncertainty and a clear trend of declining inflation are providing support for UK government bonds. This outlook has led money markets to price in nearly two interest rate cuts by the Bank of England in 2026. Cole recommends buying UK government bonds while simultaneously selling German bonds.