Still, a delay to forecast rate cuts could keep yields at elevated levels and contain prices rises. And longer-term gilt yields could still spike again if political risk resurfaces after a volatile and newsflow-driven year in 2025<\/a>. Investors will also be mindful that the increased supply of bonds amid higher government borrowing and Bank of England gilt sales could weigh on prices.<\/p>\n<\/p>\n UK Politics is a Continued Risk Factor for 2026<\/p>\n After the Autumn Budget less than a month ago, some fund managers say that political risk is now lower, but remains a possible trigger of bond market volatility into 2026.<\/p>\n UK bond yields spiked, first in January, then in September and then in the lead-up to the Autumn Budget. Yields on long-term debt came close to 30-year highs<\/a> as bonds sold off amid concern over government finances. From a bond investor\u2019s point of view, while yields make the headlines in these turbulent periods, bond prices fall, harming total returns. Higher yields show investors are demanding a premium for investing in UK debt, but from an income perspective, bond coupons remain the same.<\/p>\n Investors have focused their attention on long-term bond prices and yields: While the 10-year gilt yield is the same at the end of 2025 as at the start, but the 30-year gilt yield is 30 basis points higher.<\/p>\n<\/p>\n After the budget on Nov. 26, the UK chancellor, Rachel Reeves, told British MPs that \u201cit\u2019s best if chancellors don\u2019t comment on bond markets.\u201d But it was clear in 2025 that bond markets were commenting on the chancellor\u2019s performance at key points.<\/p>\n Autumn Budget Calms Bond Investor Nerves<\/p>\n After the budget, the government\u2019s tax, spending and borrowing plans were laid out<\/a> and yields have fallen back.<\/p>\n Morningstar international economist, Grant Slade, says that the government enters 2026 in a better shape that it started 2025.<\/p>\n \u201cThe chancellor has emerged from the Autumn Budget in November with improved fiscal headroom, offering a signal that the government remains committed to debt reduction, longer-term,\u201d he says.<\/p>\n \u201cThis could, in turn, promote lower gilt market volatility in 2026, with the government possessing greater wiggle room relative to its self-imposed fiscal rules.\u201d<\/p>\n Royal London Asset Management\u2019s outlook notes that bond markets will welcome \u201cgreater clarity around the UK\u2019s fiscal position\u201d into 2026, which will lower yields further.<\/p>\n Shaan Raithatha, senior economist at Vanguard Europe, says that better economic growth figures into 2026 \u201cshould also support fiscal credibility.\u201d The IMF predicted in October that the UK would be one of the fastest-growing economies in the G7. Better growth would increase income tax receipts and reduce reliance on government borrowing, leading to lower yields.<\/p>\n Political Risks and the Bond Market Outlook<\/p>\n But political risk has not been banished, particularly as the prime minister, Keir Starmer, just survived a leadership challenge in the autumn and has very low poll ratings.<\/p>\n Morningstar\u2019s Slade says a revived threat to his position could be another flashpoint for bond markets in 2026.<\/p>\n \u201cThe risk of a leadership challenge to Starmer offers the potential for further gilt market disquiet, particularly for the longer-end of the curve,\u201d he says.<\/p>\n \u201cStarmer is among the most fiscally conservative of his party peers and a successful leadership challenge would likely see a new chancellor installed with lessened commitment to fiscal consolidation than that of Rachel Reeves,\u201d he adds.<\/p>\n \u201cUnder such a scenario, we\u2019d expect to see longer-dated gilt yields widen and increased volatility in gilt prices in the intervening period. That said, it is likely that a leadership challenge is already partially priced into markets given Starmer\u2019s widespread lack of popularity amongst voters.\u201d<\/p>\n Kathleen Brooks, research director at XTB, says investors should expect domestic politics to make a comeback in the spring.<\/p>\n \u201cThe local elections on May 7 are a major political risk for bond and FX investors in the UK,\u201d she says.<\/p>\n \u201cThe result of these elections could lead to a change of direction for the Labour party, and potentially a leadership challenge to Keir Starmer.\u201d<\/p>\n Next year\u2019s Spring Statement and Autumn Budget are also potential triggers for bond market volatility, as they have been in 2025.<\/p>\n Asset manager BlackRock says that markets will be still be watching the finer details of the chancellor\u2019s plans for signs the government is off course. \u201cThe recent budget aims to shore up market confidence through fiscal consolidation. But deferred borrowing cuts could bring back gilt market volatility,\u201d it says. BlackRock maintained a neutral stance on UK equities and gilts in its 2026 outlook.<\/p>\n The Government is Selling More Bonds, So Is the Bank of England<\/p>\n Two supply factors affecting bond prices could be pertinent to investors next year. First, the UK government is selling \u00a3303 billion of new bonds in 2025-2026, a rise of \u00a34.6 billion on the year before. Short, medium- and index-linked bonds will see the biggest increase in issuance.<\/p>\n And the Bank of England still has more than \u00a3500 billion of UK government bonds acquired after the financial crisis to sell into the market. The central bank has been urged by former central bank policymakers to stagger this \u201cquantitative tightening\u201d process to avoid flooding the market with UK debt, a move that could depress prices.<\/p>\n How Much Will the Bank of England Cut Rates in 2026?<\/p>\n While the Bank of England cut interest rates four times in 2025<\/a>, from 4.75% to 3.75%, investors don\u2019t yet know many more rate cuts will occur in 2026. The \u201cterminal rate,\u201d the final point in this current monetary policy cycle, is hard to assess, economists say. But current assumptions point to up to 75 basis points of cuts ahead, which would leave rates at 3%, still higher than in Europe, where the key policy rate is 2%.<\/p>\n Futures markets are showing possible rate cuts in March and April. But analysts at Bank of America says assumed rate cuts may not materialize that quickly, which will support yields at current levels.<\/p>\n \u201cThe very fact that the UK is entering terminal rate territory will naturally lead to increased caution and an increasing data dependency approach. This is where the rates market could come foul of the data once more,\u201d their analysts say.<\/p>\n<\/p>\n Much depends on whether the UK inflation moves back to the 2% target in 2026, after a period of \u201csticky\u201d inflation in the UK that kept interest rates much higher than in the eurozone, Switzerland and Sweden.<\/p>\n There is a consensus among fund managers that UK government bond yields remain competitive relative to other developed countries, as well as beating inflation, so offering \u201creal yields.\u201d For example, Germany\u2019s 10-year bond yields 2.85%, nearly two percentage points below the UK\u2019s equivalent security.<\/p>\n Whether bonds will continue to offer competitive yields relative to cash and equities is a vital question next year if rates fall.<\/p>\n Because bond yields reflect interest rate and inflation expectations, this trajectory matters for investors buying UK government bonds or gilts for income. In the case of UK bonds, interest rate cuts are likely to lower the yield and boost the price of short-term debt.<\/p>\n James Klempster, deputy head of the Liontrust multi-asset team, says the UK gilt yield is 26 times higher than it was five years ago, a \u201cbarely believable\u201d increase after a surge in inflation during this period.<\/p>\n Royal London\u2019s 2026 outlook says that, \u201cgovernment bonds are paying their way once more\u201d with real yields on UK debt now above 2%.<\/p>\n Currently the 10-year gilt yields just below 4.50%, while the FTSE 100\u2019s dividend yield is around 3.16%.<\/p>\n
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<\/a>UK Bond Market Valuation<\/p>\n