Are UK Government Bonds (Gilts) A Good Investment

Home > Analysis > Should you buy UK Gilts?
  • Sticky inflation spooked gilts market and raised rate expectations
  • Near-term gilts yielding in excess of 5%
  • Higher-than-expected gilts yield attracting investor interest

Is now a good time to buy UK Government Gilts?

The best savings accounts now offer decent interest rates, but people cannot be blamed for wanting to take on a little more risk in the hopes of better returns and buy gilts.

However, whereas savings accounts are generally safe (although there is never a 100% guarantee other than the FSCS protection) there is a big difference between a savings account and investing in bonds.

Unlike savings accounts, the price of a bond can go down as well as up so it is possible that you will get less than you put into the investment.

UK Government Gilts are issued by the UK Government to finance public spending and are therefore relatively safe, generally rated AAA by the major credit agencies. For more information about UK Government Gilts and how they compare to other types of bond investing read our guide on how to invest in bonds. In it, we cover the pros and cons of most types of bonds as well as have a video discussion about the risks and rewards. Or, for the more ethically minded, take a look at our guide to Green Gilts.

Untamed inflation sends interest rate skyrocketing

No sooner did the Bank of England predict in May that the “CPI inflation is expected to fall sharply from April” than reality began to shatter the rosy illusion. That very same month, the UK CPI index hit 8.7%. Core inflation, a figure that excludes the more volatile food and energy, struck 7.1% – the highest level since 1992. What hit consumers hard was food inflation, which remained at an elevated 18.4%.

In summary, households are still spending more money on a smaller basket of goods. The ripple effect from last year’s inflation spike is continuing to hurt consumers and businesses. Demand for pay rises continue unabated.

Source: ONS

The out-of-control inflation has struck fear into the Old Lady of Threadneedle Street. As the gulf between the actual price trend and the central bank’s target rate of 2% widens, panic-stricken MPC members swiftly voted 7-2 in June to raise the base rate by 50 basis points – the thirteenth hike thus far – to salvage the situation.

The UK base rate now stands at a staggering 5 percent, the highest level since 2007 (see below). More worryingly, this policy rate is expected to reach 6 percent later this year due to the strengthening inflation.

But strong monetary medicine has consequences. To tame the runaway inflation via aggressive rate hikes, the Bank of England is causing mayhem in the mortgage sector.

Source: BBC

Just to recap, the property market generally thrives on low rates; it withers on high borrowing costs. The post-pandemic housing boom is slowly melting away by the scorching interest rates. Homeowners who require mortgage refinancing now are staring at the highest mortgage rates in a generation. Two-year fixed rate mortgage exceeds 6 percent recently. Even the UK government can’t escape from the debt vortex.

According to the Office of Budget Responsibility (OBR), interest payments of the UK government’s gargantuan £2.5 trillion debt pile over 2022-2023 is expected to reach 4.2% of UK’s GDP. Imagine, just imagine, four percent of a country’s output goes to interest payments…..

But are the macro conditions as bad as they sound? Amidst all these gloom and doom, there is one bright spot.

Soaring gilt yields tempt investors, should we buy?

For savers, the 5 percent rate is a godsend. For years and years, capital holders were severely punished for their frugality.

Zero, sometimes negative, interest rate destroyed the compounding system. Capital owners could only stare at the pitiful rates and wonder ‘what’s the point of saving?’. But the table has turned. With short-term gilt yields now hovering above 5 percent, investors are starting to return to the gilt market en masse.

Take a quick look at the UK yield curve below.

Simply, this chart plots the gilt yields of different maturities in one graph. On the left are the shortest maturities, say 1 or 3 months. As we move to the right, the maturity lengthens. As of 26 June, gilts with maturity of 50 years offer investors an annual yield of 4 percent.

In contrast, gilts with less than 18 months maturity offers yield of more than 5 percent. When yields of shorter maturities are above that of longer maturities, this is known as an ‘inverted yield curve‘. This suggests that short-term interest rates are expected to go up. Past research indicates that an inverted curve predicts an economic slow down.

When the central bank raises the policy rate, it pulls rates of all other debts up too, debt like gilts, mortgages, corporate bonds et cetera. It makes these instruments more attractive as interests offered increased. Banks are coming under pressure now to pass on the higher rate to savers too.


But what has this information got to do with bond investing? Plenty.

For example, gilts’ rising yield has reached a point where investors can justify in their portfolio. But the gilt market is a large one. There are many ways to participate in the bond market. You can either buy individual gilts or a portfolio of gilts; you can also choose the maturity of the gilts.

Scroll to Top