The elevated yields on UK gilts are not driven by a single risk-premium shock; macro conditions and supply-demand factors remain the core variables

Overview

This report focuses on why UK gilts remain a major market concern. Goldman Sachs argues that recent underperformance in UK gilts cannot be explained simply by a single UK-specific risk event; instead, it reflects the combined effect of broadly higher global long-end yields and term premia, weak UK macro performance, elevated inflation, uncertainty over the policy reaction function, fiscal supply pressure, and changes in demand structure.

Core views

The core views are: first, the UK gilt term premium has risen sharply since 2022, consistent with the UK's low-growth, high-inflation and high-uncertainty macro backdrop; second, the recent relative underperformance in gilts looks more like a repricing of the BoE policy path than a fresh, large increase in risk premia; third, fiscal deficits, BoE QT, and falling pension demand explain the persistent supply-demand pressure; fourth, near-term political and fiscal risks may keep risk premia sticky, but if macro data support the BoE holding rates in 2026 and cutting in 2027, gilts could see a more durable recovery.

Analysis framework

The report places UK gilts in the context of a global re-pricing of long-end rates, combining G4 term premia, 30-year gilt yields, swap spreads, the 10s30s curve, uncertainty around growth and inflation forecasts, front-end rate volatility around BoE meetings, gilt holder composition, free-float supply, and a term-premium decomposition model to assess the sources and future direction of UK gilt risk premia.

Methodology notes

• Macro fixed incomeTerm-premium valuation and decomposition framework

  Decompose the UK 10-year gilt term premium into global term premium, Bank of England holdings, free-float gilt supply, policy uncertainty, unemployment gap, and residual drivers.

  The model shows that most of the rise in UK gilt term premia comes from supply factors, BoE QT, and G3 term-premium repricing; policy uncertainty played a role in earlier years, but its recent contribution has been limited.

• Cross-market comparisonG4 long-end yield and curve comparison

  Compare long yields, swap spreads, 10s30s curves, and term premia across the UK, US, euro area, Germany, and Japan.

  This approach is used to distinguish UK-specific risks from a global re-pricing of long-end rates. The report concludes that the UK is not always the source of bad bond news, and some relative indicators have improved over recent quarters.

• Supply-demand analysisDuration-adjusted free-float supply and holder-structure analysis

  Track the stock of gilts absorbable by the private sector, 10-year-equivalent supply, BoE holdings, pension holdings, and changes in the share of price-sensitive investors.

  The report argues that the BoE shifting from duration buyer to seller, pension demand structurally declining after the 2022 gilt crisis, and a larger share of supply being absorbed by price-sensitive holders all pushed up risk premia.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• UK gilts

  Core research subject

  Strengths

  Yields are at historical highs, and if the BoE turns to cuts in 2027 there is room for continued relief; some relative valuation measures have improved versus peers over recent quarters.

  Weaknesses

  The UK has weak growth, high inflation, and elevated macro and policy uncertainty; fiscal deficits and QT create large supply pressure, while pension demand has structurally declined.

  Comparison

  Compared with the US, euro area, and Japan, UK term premia have risen more sharply since 2022, and 30-year yields are also at the high end of developed markets.

  Risks

  Fiscal easing, energy and commodity shocks, sticky inflation, a more hawkish BoE policy path than expected, and worsening supply expectations.

• US Treasuries

  Global long-end rate benchmark

  Strengths

  Useful for showing that higher long-end yields are not a UK-only phenomenon.

  Weaknesses

  US long-end yields are also near cycle highs, and term premia have risen significantly.

  Comparison

  US term premia are below the UK's, but the global re-pricing direction is the same.

  Risks

  Global inflation risk, fiscal supply, and changes in monetary policy expectations.

• German Bunds and euro-area rates

  European peer comparison

  Strengths

  The German 30-year yield has risen to post-sovereign-crisis highs, showing that European long-end rates are also being repriced.

  Weaknesses

  The euro area also faces inflation risk and rising term premia.

  Comparison

  UK gilt term premia are higher, but relative indicators such as swap spreads and the 10s30s curve have not been deteriorating continuously.

  Risks

  Euro-area inflation, fiscal developments, and changes in ECB policy path.

• Japanese Government Bonds

  G4 comparison asset

  Strengths

  Shows that the global rise in long-term rates has extended to markets that previously had very low yields for a long time.

  Weaknesses

  The 30-year Japanese government bond yield has risen to a multi-year high.

  Comparison

  Japan's curve is steeper on 10s30s, but the UK's term premium level is higher.

  Risks

  BoJ policy normalization and a renewed rise in global term premia.

• Sterling front end and belly

  Trading expression

  Strengths

  The report thinks long positions in the front end and underweights in the belly are more attractive in the near term.

  Weaknesses

  The front end is highly sensitive to the BoE reaction function and inflation data.

  Comparison

  Front-end rate volatility around BoE meetings is higher than in other G4 markets.

  Risks

  A repricing of the BoE path, inflation surprises, and energy price shocks.

Key data

• 30-year UK gilt yieldAbove 5.8%The report says this reached levels not seen since 1998 this week.
• 2026 year-end 10-year UK gilt yield forecast4.40%Goldman’s base case still assumes the BoE will keep rates unchanged in 2026 and begin cutting in 2027.
• Medium-term fiscal deficit sensitivityA 1 percentage point rise in the deficit ratio corresponds to roughly a 30-40 bp increase in UK gilt yieldsUsed to gauge the potential yield pressure from fiscal easing or higher spending commitments.
• Change in UK 10-year term premiumAround the 240 bp to 260 bp rangeThe chart suggests UK 10-year term premia were elevated in 2025-2026; the exact value is a visual estimate.
• Front-end rate volatility around BoE meetings1-year OIS average absolute move on meeting days of about 6.5 bp, with a standard deviation of about 9.7 bpHigher than Japan, the euro area, and the US, reflecting uncertainty over the policy reaction function.
• Pension fund gilt holdings as a share of total debtRoughly down from 32% in 2019 to 13% in 2025Shows the weakening of a traditional domestic source of demand.
• BoE gilt holdings as a share of total debtRoughly down from a peak of 36-37% in 2021 to 18% in 2025Reflects QT and lower demand from the official sector.

Impact & implications

From an investment perspective, elevated UK gilt yields should not be read simply as absolute cheapness, because risk premia remain constrained by fiscal, supply, and policy uncertainty. The report also stresses that if future inflation and the BoE policy path align with Goldman economists' base case, macro drivers may outweigh supply-demand pressure and bring yields down. On trading, Goldman sees near-term long positions in the front end and underweights in the belly as more attractive, while warning that energy, commodities, and fiscal events could push yields higher.

Risks

• Further fiscal easing in the UK or higher defense spending commitments could lift expectations for future gilt supply.
• Higher rates themselves add to fiscal pressure, making it hard for UK gilt risk premia to compress meaningfully in the near term.
• Disruptions in global energy and commodity markets could skew inflation and yield risks to the upside.
• If the BoE path turns out more hawkish than expected, front-end and long-end yields could rise again.
• Lower pension demand, BoE QT, and a higher share of price-sensitive investors could amplify market volatility.
• The term-premium model uses orthogonalization of global term premium and BoE holdings, but endogeneity constraints may still remain.

What to watch

• Whether UK inflation data support the BoE keeping rates unchanged in 2026.
• The BoE's communication on the path to rate cuts in 2027 and changes in market pricing.
• The impact of fiscal rules, the deficit path, defense spending commitments, and budget events on gilt supply expectations.
• Free-float gilt supply, the pace of BoE QT, and changes in pension and LDI demand.
• Whether UK growth and inflation forecast uncertainty remains higher than in other major economies.
• Global long-end term premia, energy prices, and commodity market disruptions.
• Relative changes in the UK 10s30s curve, swap spreads, and G4 term premia.