Home > Investing > Where can I buy UK Government gilts and is now a good time?

A reader has asked: Where can I 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.

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.

You can buy UK Government bonds either directly from the DMO or through various bond brokers and investment platforms like:

  • Hargreaves Lansdown – has an excellent free-to-view market data portal where you can view bond and gilt prices.
  • Interactive Investor – charge a low flat monthly fee for all their investing accounts

Is now a good time to buy UK Government Gilts?

Gilt prices rise and fall. At times, dramatically so. The days following the mini-budget were chaotic and outside the normal perimeter of the gilt market’s staid history.

A quick view of the day-to-day price movements of long gilts shows how shocking the turbulence was.

Change in 30 year gilt yields

Source: Financial Times

But, as the saying goes, “there are no bad bonds, only bad prices.” After such a sharp decline, should bargain hunters snap up UK government gilts and bonds? Yes and no.

  • Yes, only if you think the next UK government will stabilise the market completely and that interest rates will not resume their upward march.
  • No, if you assume that some chaotic days are still ahead. Avoiding the bond volatility and monetary tightening phase may not be a bad idea at all. Not to forget, during an economic downturn, cash is king.

Why has the price of gilts dropped?

The market is a function of supply and demand. When demand falls, so does price. When demand falls dramatically, so does price. Gilt prices have plunged.

Gilt price drop

The recent falls in the gilt market was the result of several long-running trends and a catalyst. The first is a hawkish Bank of England. The fading pandemic impact and a tightening labour market have prompted the bank to shift its dovish monetary stance late last year. The base rate rises and gilt prices declined.

Second, Ukraine. Specifically, the war there led to a spike in energy and food prices – all essential goods in the real world. No wonder inflation soared to double digits. This forced the central bank to hike the policy bank rate at a faster rate.

Official bank rate

Source: Bank of England

Finally, the mini-budget. Kwasi Kwarteng, the then chancellor misjudged the mood of the market by dishing out a £45 billion debt-funded tax cuts. Frightened investors stampeded out of Sterling immediately and then gilts. Leveraged liability-driven investments (LDI) compounded the situation by dumping gilts to meet margin calls. A ‘doom loop’ was set in motion.

So chaotic was the situation that the Bank of England had to intervene in the gilt market to stabilise prices. While the new Chancellor, Jeremy Hunt has rolled back much of the tax cuts in the mini-budget, but the damage is done.

Bond vigilantes are back with a vengeance.

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 (March 2022) show the total UK debt borrowings to be £2.365 trillion.

UK government debt

Source: Office of National Statistics

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 as an example.
Bonds versus gilts

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.

Generally speaking, shorter-maturity government bond yields (maturities of less than two years) track the central bank policy rate. This means that as central bank raises the policy rate, these yields rise too. Longer maturity bonds, however, may not track the policy rate entirely for a variety of reasons, including inflation expectations.

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

Are government gilts a good investment?

What makes a ‘good’ bond investment? A good rate of return that matches inflation with no threat to the principal.
With inflation raging above 10 percent, investors are certainly in no mood to buy bonds. The reason is that the real purchasing power (return minus inflation rate) is being eroded constantly. Simply, £10 now no longer buys £10 worth of goods in the future.

Moreover, many investors are concluding that the long bull run in bonds has ended. Look at the multi-decade chart of the US 10-year bond yield below. A decisive break of the progression of lower high is noted. The US Fed policy will largely determine UK base rate too. In this sense, gilts are not a great place to be.
US federal reserveSource: US Federal Reserve
However, a sharp fall in bond prices (causing yields to exceed some thresholds, say, 6%), it may present some investors with a good opportunity to lock in some defined returns for the portfolio. This approach requires investors to know a) which bonds/gilts present better value and b) how much of bonds to buy for the portfolio.

How safe are government gilts?

Not all sovereign debtors are equal. What differentiates 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.
Sovereign Risk Indicators
Source: S&P Global
That said, the UK economy now carries a debt-to-GDP ratio of around 100%. The recent turmoil in the gilt market shows things can spin out of control easily. S&P recently lowered the UK sovereign rating to ‘negative outlook’. Therefore, buying gilts should be part of a diversified portfolio. You can do this easily with exchange-traded funds.

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