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Buying gilts has become more popular among investors as the economy and interest rates have seen increased volatility. In this guide, we explain how to buy Government Gilts, what they are, where to buy them and the potential risks and rewards of buying “gilt-edge” government bonds.

How & Where Buy UK Government Gilts

You can buy UK Government bonds either directly from the DMO or through various bond brokers (see here for US ones) and investment platforms like:

  • Hargreaves Lansdown – has an excellent free-to-view market data portal where you can view bond and gilt prices. Bond dealing commission: £11.95/Bond account fee: 0.45%
  • Interactive Investor – charges a low flat monthly fee for all their investing accounts. Bond dealing commission: £7.99/Bond account fee: £9.99 a month.
  • AJ Bell – a well-established low-cost investment platform. Bond dealing commission: £9.95/Bond account fee: 0.25%.
  • Saxo Markets – For advanced and professional investing. Bond dealing commission: 0.2% to 0.05%.

The process for buying gilts is:

  1. Search for gilt that fits your investment criteria and look up the symbol for that instrument.
  2. Be careful to note the coupon payment (normally in percentage), maturity date, current prices et cetera.
  3. The price you purchase will determine your overall return.
  4. Gilts are redeemed by the Treasury at £100 (known as “par”). Gilt investors make money via a combination of coupons and capital gains at maturity.

For instance, on Interactive Investor’s bond website you can find a small list of gilts available to trade on the platform.

Source: www.ii.co.uk/bonds

Is now a good time to buy UK Government 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

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.

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.

Source: Worldgovernmentbonds.com

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.

Five important factors to consider when buying gilts

When we talk about buying government bonds like gilt, we focus on a few factors, like:

  • Current yields – how much is the bond offering investors now?
  • Maturity – how many more years do the debt instrument last?
  • Credit ratings of the borrowing entity – is the organisation financially viable?

As you can see above, gilts of different maturities offer different yields.

Assuming the credit rating of the UK government remains strong for the time being (AA-stable by Standard & Poor’s), the next two important factors are yield and maturity. How long do you intend to hold the debt for? Is the yield compensating investors sufficiently?

Recent data from bond brokers like Interactive Investor show that investors are picking up the near-term gilts (those maturing within 24 months). Yields are high; holding period short. A good parking place for surplus capital.

More crucially, during these hectic days there are two additional factors to consider:

  • Trend of rates – Will interest rates rise much further in the coming months and stabilise at a level higher than current expectations? If interest rates were to overshoot to the upside, it means bond prices will drop further from here.
  • Real interest rates – Will nominal rates compensate investors enough for the inflation?

A quick back-of-the-envelope calculation (inflation at 8%, roughly; base rate at 5%) shows UK’s real interest rate is still negative. That means the purchasing power of cash is being eroded over time.

Gilt ETFs for your portfolio

Average investors need to diversify. In doing so, it reduces the overall portfolio risk. Asset diversification balances the risk.

With near-term gilt yields now floating above 5 percent, interest in the sector is rising. However, instead of buying individual gilts, a portfolio of gilts may be more appropriate for some investors.

For example, the iShares 0-5 year Gilt (IGLS) is an exchange-traded fund (ETF) that holds a portfolio of gilts with maturities ranging from 0 to five years. According to its factsheet, more than 50 percent of IGLS’s £1.9 billion gilt portfolio matures within 24 months. A bond ETF, like many equity ETFs, may track a bond index. Here IGLS tracks the “FTSE UK Conventional Gilts – Up To 5 Years Index“.

From a high of 135, the ETF has dropped to 122 last year due to the surging interest rates. Recent price action turned bearish as interest rates surge further. Right now, the ETF’s yield-to-maturity fetches about 5 percent.

Another ETF that may interest readers is the iShares Gilt ETF (IGLT). This £1.7 billion bond fund (factsheet here) follows the “FTSE Actuaries UK Conventional Gilts All Stocks Index”.

There is another sector that may be worth a look – index linked gilts. These bonds are linked to the price index Retail Price Index (PRI). Coupons and principal of the bonds are adjusted according to a set rules using the RPI index. These adjustments helps to offset the erosion of buying power of capital. You can find out more about index linked gilts from the Debt Management Office (DMO).

There is a bond ETF that holds just indexed linked gilts. This is the £700 million iShares index-linked Gilt ETF (INXG, factsheet here). Due to the long-maturity of its gilt holdings, the bond is particularly volatile. In 2022, the ETF’s total return was a shocking -34 percent. In the US, the equivalent is the TIPS Bond ETF (TIP).

How do government gilts work?

Gilts are government bonds, which is a financial instrument with a promise – a promise to pay a certain sum in the future. In this case, the debtor is the UK government.

It works like this. The UK government borrows money from the market to spend; it then raises revenue from the economy via taxes; and uses the tax revenue to repay interest and capital to the creditors.

Sometimes, the government will use new borrowings to retire old borrowings when it is cheaper to do so. The most recent statistics (April 2023) show the total UK debt borrowings to be £2.516 trillion – an addition of £100 billion a year (see below).

Source: ONS (28 Apr 2023)


How safe are government gilts?

Not all sovereign debtors are equal. What differentiates sovereign bonds are the rate of interest, collateral, duration, and sums to borrow.

Creditors certainly want to borrow from sovereign governments that can repay. This ability to repay is measured crudely by sovereign credit ratings. Third-party professional firms called rating agencies (S&P, Fitch, and Moody’s) assigned these ratings to nearly all governments that issue bonds. The UK has enjoyed good ratings in recent years. The chart below compares the S&P sovereign ratings across the world. The UK is currently double A investment grade (2Q 2023)


Source: S&P/Wiki

What is the relationship between gilt yields and price?

The relationship between bond yield and price is simple: They move in the opposite direction. Look at the chart below. Here I use a US bond ETF (IEF) as an example.

As US bond price dropped throughout the past year (blue line), the 10-year bond yield rose (orange line). In other words, the higher the bond yield, the lower the price.

Bonds versus gilts


Generally speaking, shorter-maturity government bond yields (maturities of less than two years) track the central bank policy rate closely.

This means that as central bank raises the policy rate, these 0-2 year yields rise too. Longer maturity bonds, however, may not track the policy rate that closely for a variety of reasons, including inflation expectations.

  • Further reading: You can read more about how bonds work here in our bond guide.

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