Is now a good time to buy gilts as an investment?

UK 10-Year gilt yield towers over other major economies

Bond vigilantes are back. Not in Trump’s America (yet), but here in London. They are lurking in the shadows of the gilt market.

Over the past few quarters, the 10-year gilt yield (interest rates on UK government bonds) had traded firmly above 4 percent. The series of up and downs movements here, whilst seemingly small and ‘noisy’, affirmed this crucial message: Gilt yields are not dropping.

Look at the 10-year gilt yield’s long-term chart below. Seasoned investors will probably conclude that the yield is more likely to go up than down. Since 2022, for example, each peak rose above the last high; equally, each reaction low bottomed out at levels higher the previous one. The upward sloping zig-zag movement is carrying the yield higher and keeping the uptrend from 2020 in motion (see below).

Meanwhile, the 30-year gilt yield rose to another multi-decade high this week, to 5.67 percent.

But, readers may point out that the Bank of England is on a rate-cutting cycle. That’s true. The Old Lady recently reduced the policy Base Rate by 25bps. That was the fifth reduction since 2024. But interest rates on long-maturity government bonds – maturities stretching out to a decade and beyond – are more volatile. And less controllable, too, as other economic factors come into play.

More worrying for the UK is that its equivalent maturity bond yields are higher than most other major developed economies. At 4.7 percent, UK’s gilt yield is nearly two percent higher than Germany’s. Even the US bond yield has fallen in recent weeks, creating a 30-40bps spread between US-UK (see below).

In the world of finance, risk commensurates with return. As gilt yields start to tower over others, this means that investors are demanding more compensation to buy and hold UK gilts. This is due to perceived higher investment risks on the country.

Source: Yardeni.com

However, what sort of sovereign investment risks is the market worried about?

1. Fiscal risk – uncertainties are weighing on UK government finances because of the wider unpredictable macro environment. Tariff is one source of uncertainty; a recession is another. The government needs to keep borrowing to sustain its spending.
2. Inflation risk – market worries that UK CPI will continue to rise in the next few quarters. As a reminder, July CPI readings touched 3.8 percent. That’s nearly double the 2 percent inflation target. Nobody is certain that the CPI number is contained.
3. Political risk – investors fear a potential re-run of Kwasi Kwarteng’s disastrous ‘mini budget’. Some say a ‘moron premium’ is being slapped (again) on gilts these days. Investors particularly dislike the ‘tax and spend’ policies of the current Labour government.

Taken together, it appears the market is pricing in higher risks on UK bonds than other countries. To the point that some mainstream newspapers (eg, The Telegraph) recently shouted with headlines like “Britain ‘heading towards IMF bailout’“. Gloom and doom is spreading quick.

Whether the government can break this doom loop soon is hard to say. But Downing Street is getting its act together in an attempt to re-assert the narrative. A new team is put in place in Number 10 on September 1. If bounce in GDP numbers may help to alleviate some fears.

Bottom line: The danger point for investors is when the 10-year gilt yield crosses into the 5-6 percent band and stay there. This is a psychologically important area. A break north of this level, which sits a 20-year high, will lead to increased market jittery and perhaps a swift asset correction. Higher borrowing costs will lead to a bigger fiscal hole as interest payments rise. For now, investors are continuing to monitor the direction of the gilt market.

Investors rushed to take advantage of higher yields

Amidst this bearish bond outlook, many investors, especially retail side, are seeing the elevated gilt yields as a gift to be taken advantage of.

According to one FT report last week (£), retail investors are piling into gilts. Hargreaves Landsdown, for example, told the financial newspaper that “bond sales overall so far this year were 49 per cent higher than in the first eight months of 2024.”

Yields aside, investors are snapping up gilts is because of the capital gain exemption feature. The long list of gilt-edge securities that is exempted from capital gains tax is listed on the HMRC website here.

One example of this list is the 3/8% Gilt 2026 (ticker: T26A, LSE page here), which is set to be redeemed next October. After prices crashed in 2022, the gilt is slowing rising into par, earning investors additional capital gains on top of the normal coupons.

However, gilt prices can swing greatly, especially those with long maturities exceeding ten years. An example is the 0.5% Gilt 2061 (ticker: TG61) issued in 2020. Its prices have plummeted by more than 70 percent as interest rates soared. This trend may last longer than expected (see an interesting trading episode of TG61 here).

If you aren’t sure how to trade these gilt securities, perhaps sticking to a shorter-term bond fund or ETF (ticker: IGLS) might be a better idea.

(You can read all about Gilt Investing here on Good Money Guide.)

Silver breaks out! Gold soared to new highs

Silver, after a multi-week consolidation, finally stirred to life this week.

Prices crossed above the $40 for the first time in years, a breakout that cemented the long-term bull trend. With the toppling of the $40 resistance, the next upside target is pencilled in at $44-45, around 10 percent higher from here. Silver optimists naturally wonder: Will silver break its all-time high at $50 this year? Quite possibly, given the metal’s still-intact trend.

Silver’s stunning performance did not happen alone. The catalyst for silver’s breakout is, of course, due to gold. The monetary metal broke new record highs on Monday (September 1), as the London Bullion Market Association ended the session at $3,475.

To recap what is underpinning gold’s multi-year rally:

• political uncertainties (particularly Trump’s ongoing assault on the Fed)
• government debt worries (‘Fiscal Dominance’ is a hot topic)
• higher-than-expected inflation

Until these factors fade away somewhat, chances of gold rallying into $4,000 are good.

(You can compare Gold brokers here on Good Money Guide.)