Goldman Sachs analysts point to a decline in 10-year bond yields below 4% - here's what's behind these forecasts

Experts from Goldman Sachs, James Moberly and Sven Jari Stehn, published a report containing significant forecasts regarding the trajectory of the UK debt market. According to their analysis, the yield on 10-year bonds may drop to 4.0% before the end of this year — a scenario that indicates a possible rebound in the government bond market.

A key premise for these expectations is the prospect of aggressive interest rate cuts. Goldman Sachs estimates that the Bank of England will make three reductions to the base rate this year, ultimately bringing it down to 3.0%. Such steps would be a response to the observed weakening of inflationary pressures across the economy.

What drives the change in inflation conditions? Experts point to several factors. Falling energy bills for households act as a tailwind for consumers, while the services sector remains relatively stable in price. The combination of these elements translates into solid grounds for a significant decline in inflation over the coming months.

It is worth noting a secondary but important aspect of the forecast — the market valuation assessment. Goldman Sachs suggests that investors have overly harshly priced UK securities, focusing excessively on existing fiscal challenges. This undervaluation may create opportunities for those expecting a normalization of 10-year bond yields toward the 4.0% level within a year.