UK Gilts Forecast to Outperform in 2026 by BCA Research
- Written by: Gary Howes
Image © Adobe Images
UK government bonds - or gilts - will deliver the best returns to fixed income investors next year, says BCA Research.
The independent research house, founded in 1949, says UK gilts will go from being the 2nd best performer in its class of 2025 to the best-performing bond market in 2026.
BCA shows gilts delivered the best currency-hedged returns of 2025 after U.S. Treasuries.
"We were on the right side of this trade in 2025 and believe gilts are most likely to take the top spot in 2026," says BCA.
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The performance will rely on a dovish Bank of England and reduced concerns about the sustainability of British government debt.
The call has implications for sterling, which could track bond yields lower.
A bond yield is the effective interest rate yielded to investors holding a bond; it is inversely correlated with the bond's underlying value. i.e., if a bond rises, its yield falls.
If foreign exchange markets track relative changes in bond yields next year, as is traditionally the case, then the drop in yields would weigh on the pound.
Above: GBP/EUR has tracked falling bond yields (lower panel) lower in 2025.
BCA's view on gilt outperformance rests on a deteriorating economy that will prompt the Bank of England to provide support by lowering interest rates.
By lowering interest rates, the Bank will support bond prices, most notably in the short-dated brackets.
"In the UK, the recently accelerating rise in the unemployment rate has already triggered a recessionary warning signal, raising concerns about the UK's economic outlook. Vulnerable labour markets in the US and UK keep recession risks elevated heading into 2026, indicating a flat-to-lower direction for yields," says BCA.
Image courtesy of BCA Research.
The market is pricing a cut from the Bank of England next week with another by April.
An additional third is priced over the remainder of the year.
"We believe those are virtually guaranteed with inflation normalising," says BCA.
However, labour market weakness creates "material downside to the policy rate, making the BoE the most likely central bank to surprise dovishly in 2026," adds the research.
Further Bank Rate cuts will assist gilts while suppressing their yield.
