Goldman Sachs Lifts UK 10-Year Gilt Yield Forecast to 5% on Surging Energy Prices

Goldman Sachs has significantly raised its forecast for the United Kingdom's 10-year Gilt yield, now projecting it will reach 5% by the end of 2026, up from a previous estimate of 4.4%. The bank attributed the revision to a recent surge in energy prices, which it believes will limit the scope for the Bank of England to provide monetary policy relief.

Energy Surge Dims Rate Cut Hopes

The revision follows a broad rally in energy markets that has clouded the inflation outlook. Goldman Sachs noted that its previous forecasts had assumed UK government bonds, or Gilts, would be a primary beneficiary of easing inflation. However, with energy prices making new highs, that expectation has been reversed.

According to the bank, the threshold for Bank of England action has likely already been crossed, which will curb relief at the front end of the yield curve even if energy prices moderate. The analysis comes as Goldman now forecasts a Bank of England rate hike in November.

UK Market Faces Unique Pressures

Goldman's updated Gilt forecast was issued alongside revised projections for other major government bonds, with the 10-year U.S. Treasury yield now seen at 4.75% and the German Bund yield at 3.25% by end-2026. However, the bank highlighted several factors that make the UK market particularly sensitive.

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According to Goldman Sachs, these vulnerabilities include:

• Gilt yields that are already the highest among Group of 10 (G10) economies.
• A high sensitivity to both energy price shocks and global yield movements.
• Greater uncertainty surrounding UK growth and inflation compared to other major economies.
• The largest increase in duration-weighted bond supply and a significant realignment of demand for long-dated debt.
• UK fiscal policy's exposure to volatility due to tight headroom relative to interest rate and energy price swings.

Upcoming Tests for the Gilt Market

Looking ahead, Goldman Sachs identified the Bank of England's meeting next week and the UK's end-of-October budget as the next major tests for Gilts. The bank warned that a substantial increase in government borrowing could put upward pressure on the Gilt risk premium.

While weaker labor market data or progress on underlying inflation could eventually allow the front end of the curve to ease, the immediate risk is a repricing for faster rate hikes. Goldman concluded that front-end rates are likely to remain the main source of volatility for the UK curve for the foreseeable future.