Goldman raises Gilt yield forecast as energy prices curb rate-cut hopes

Goldman Sachs has increased its projected 10-year Gilt yield to 5% by the end of 2026, up from a previous forecast of 4.4%. This adjustment comes as energy prices surge to record highs, reducing the likelihood of rate cuts at the front end of the yield curve. Energy prices, particularly natural gas and crude oil, have climbed sharply on Monday, while heating oil and gasoline also showed gains.

Goldman now sees a higher likelihood of a Bank of England interest rate hike in November, which explains the revision of their forecasts. Gilt yields are notably higher than those of other G10 economies and are particularly sensitive to energy prices and global yield movements. Goldman attributes this sensitivity to higher growth and inflation uncertainty in the UK compared to other major economies.

The bank also notes the largest increase in duration-weighted bond supply and a significant realignment of demand on the long end of the curve in the UK. While Gilt yields have risen modestly, they have outperformed across other markets since early 2022, when tensions escalated in the Middle East. The next significant events for Gilt yields will be the Bank of England's meeting next week and the UK budget at the end of October.

Goldman warns that reliance on near-term borrowing through a significant increase in Gilt issuance in fiscal year 2027 could put pressure on the Gilt risk premium.