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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.
In a bid to restore market confidence and reduce 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.
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.
Meanwhile, 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% by the end of 2026.
Read more: What are bonds and why do they matter?
The outlook for US Treasuries next year seems to be more finely balanced.
Although the Federal Reserve has cut its benchmark interest rate by nearly 2 percentage points in the past year and a half, rates on intermediate and longer-term bonds have generally remained high. Markets expect the US central bank to cut rates in 2026 following earlier easing, stronger economic growth and heavy government borrowing, which could keep long-term yields elevated.
As a result, analysts expect US yields to be more resilient than those in the UK, with the potential for continued divergence between the two markets. Inflation data and fiscal policy will remain key determinants of Treasury performance.
“The US faces a unique combination of strong growth and very heavy issuance,” said Priya Misra, portfolio manager at JPMorgan Asset Management. “That argues against a sharp decline in long-term Treasury yields, even if the Fed cuts rates.”
This year has seen a number of exceptionally large bond deals from major global corporates, highlighting how technology and telecommunications firms in particular, have turned to debt markets to fund capital-intensive strategies.
The most prominent deal of the year came from Meta (META), which raised approximately $30bn in a multi-tranche bond offering. One of the largest single corporate bond transactions ever executed by a technology company, the deal was met with strong investor demand.
It underscored the market’s confidence in Meta’s balance sheet and its ability to support large-scale spending on AI, data centres and related infrastructure.
Oracle (ORCL) followed with a substantial bond sale of around $18bn, widely reported as the second-largest US corporate bond issuance of 2025, allowing the firm to support its expansion in cloud computing and AI-driven services.
Meanwhile, Alphabet (GOOGL, GOOG), the parent company of Google completed a multi-tranche euro-denominated bond offering of roughly €6–7bn, reinforcing the euro market’s role as an important funding venue for US technology firms.
Read more: UK bonds borrowing premium may be ending, in relief for Reeves
Alphabet’s (GOOGL, GOOG) issuance reflected both strong investor appetite for high-quality credit and issuers’ desire to diversify funding sources beyond US dollar markets.
The telecommunications sector also featured prominently. Verizon (VZ) executed several large bond transactions during 2025, including hybrid issuances in the euro and sterling markets.
Looking ahead to 2026, the corporate bond market is likely to remain shaped by many of the same forces that drove large-scale issuance this year.
Technology and telecom companies are expected to remain prominent borrowers as spending on AI, cloud capacity, data centres and network infrastructure continues.
The most immediate risk to bond markets in 2026 is renewed interest rate volatility. Even if policy rates trend lower, abrupt changes in inflation expectations or central bank messaging could disrupt issuance windows.
Bond investors are generally more tolerant of higher yields than of uncertainty, and sharp repricing could quickly lead to wider spreads and reduced primary-market activity.
Heavy sovereign borrowing is another potential source of pressure. Elevated government issuance, particularly in the US and Europe, could raise funding costs for issuers.
In addition to this, geopolitical shocks could also be a factor, shaking confidence and affecting risk appetite.
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